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It turns out the system is a lot simpler than that, but still effective. What is embedded in the key is one precision resistor. When you insert the key in the ignition, the resistor becomes part of a simple circuit involving three other resistors. If the key does not have a resistor or if the resistor has the wrong value, the circuit disables part of the car's electrical system to prevent the car from starting.
i couldnt say it better, so i quoted it from another site.
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