How microchipping works
A microchip is no bigger than a grain of rice. The device carries a number, and this number is plugged into aPet Microchip 3 database that includes the name and contact information of a pet's owner. AVID and HomeAgain are the largest sellers of the microchips.
In Europe, pet microchips are becoming more standard, about a quarter of European pets have a microchip implant.

Implanting Microchips in Pets
Some pet owners are squeamish about idea of a microchip implant. You might worry that it will be a painful procedure for the animal. But it's not. The procedure doesn't even require anesthesia. The pet won't suffer at all from the implantation or at least as little as one might suffer from a routine shot.
A veterinarian uses a hypodermic needle to implant the microchip, which is why the pain your toller feels is similar to pain of a vaccination shot. And many pet owners agree that the benefits of a microchip far outweigh the temporary discomfort during implantation.
Before the vet does anything, he or she should use a microchip scanner to ensure the pet doesn't already have an implant. If it does, that means the pet already has an owner to whom it needs to be returned.
When a veterinarian receives a microchip, the manufacturer has already encoded a unique identification number into the device. Typically, the microchip comes inside a needle and applicator in a bag with the identification number on the label. The  needle includes a retractor handle that connects to the applicator for easy implantation. The vet gathers flesh between the shoulder blades of the animal, inserts the needle and pulls the retractor handle back. This simple action effectively releases the microchip, which stays in the pet permanently.
However, this implantation process alone only gives the pet a number, which is meaningless if the owner fails to register the pet.

How the Pet Microchip Works
The basic technology behind pet microchips traces back several decades. But, it wasn't until recently that thePet Microchip 7 devices became cheap enough to hit the mainstream pet market.
A pet microchip uses radio frequency identification (RFID) technology. RFID, as the name implies, uses radio waves as a medium to transmit information. An RFID tag stores data and, using electromagnetic forces for power, communicates that data to a device that interprets it. If you're curious about this process, read How RFID Works.
RFID tags come in different forms. Microchips in animals don't need to actively transmit information; they just hold information (a unique identification number for the pet). This type of tag, dubbed a passive RFID tag, has no battery and no internal power source. Rather it sits completely inert in the animal, waiting to be read.
A microchip capsule is roughly the size of a grain of rice and incorporates several components to help it do its job. First, the glass material that encapsulates the device is biocompatible. That means it's not toxic and doesn't hurt the animal's body, so your pet won't experience an allergic reaction to the device after implantation. Some versions of the microchip also include a cap made of polypropylene polymer to keep the chip from moving around once it's inside the animal. The polymer works by encouraging connective tissue and other kinds of cells to form around the capsule to hold it in place. Although surgical removal of the device is difficult, microchips don't expire or wear down. They're good for the life span of the pet.
Inside the capsule, you'll find the actual silicon microchip that holds the important information, as well as a tuning capacitor and an antenna coil. The capacitor receives power and sends it to the microchip. The microchip's information can then be picked up through the antenna, which is a copper coil.
Because it has no internal power source, a microchip like this needs a reader or scanner (also called an interrogator) to energize it.  When set to the correct frequency, the scanner "interrogates" the microchip by invigorating the capacitor with electromagnetic power. When energized, the microchip capsule sends radio signals back to the scanner with the identification number. The scanner can then interpret the radio waves and display the identification number on an LCD screen (liquid crystal display screen).
If you'll remember, a scanner uses radio waves to read the number encoded in a microchip. Just as you find your favorite radio stations by tuning into the right frequency, scanners need to be able to read the correct frequency to obtain this number. The problem is pet microchips come with different frequencies, such as 125 kHz, 128 kHz and 134.2 kHz. About 98 percent of the pet microchips in America use 125 kHz, whereas those in Europe use 134.2 kHz.
In 1996, the International Organization for Standardization (ISO), headquartered in Switzerland, adopted the 134.2 kHz frequency for pet microchips in an attempt to solve incompatibility problems. However, the United States was already largely using the 125 kHz microchip, and critics pointed out that changing to the ISO standard would be difficult and expensive.

Pet Microchip Registration
The microchip implant in your pet is useless if you don't bother to register your contact information with an agency. Each microchip carries a unique identification number, and that identification number matches your name and contact information in a database.
When you register, you provide this identification number, as well as your contact information. When a shelter finds your pet, they use scanners to read the number and contact an agency that manages the database. The agency then contacts you with the good news that your lost pet has been found. It's important you keep your contact information up-to-date in the database. Whenever you move or get a new phone number or e-mail address, you should to notify the agency of the change.
The Dutch kennel club ( Raad van beheer) now operates its own database system.

[source] how stuff works