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a MODCHIP allows your gaming console, either PS2 or XBOX to be able to play games from other countries/regions in both the NTSC and PAL format or whatever other format there is . EG, a PS2 console in Australia only plays PAL games, mod it with a Messiah 2 Mod chip, now you can play NTSC games, eg from Japan (NTSC/JAP) with no problems.
The more distinct feature is letting you play Rips or Burnt DVD-Rs, CD-Rs. The Modchips modifies your console so that it bypass the "authentication" feature in checking a DVD-R, CD-R whether it is genuine or not. It cost about 50 US dollars or so, for a decent mod chip. I'm using a messiah 2 I bought at 150bucks Aus dollars.
Although be forewarned that if you MOD the console before it's warranty period ends, you void it. AND some modchips readily screws up...I hard to change my motherboard for my PS2 once, so take care.
Hope that helps.