Their name, Chao, is a pun on the word Chaos featured heavily in the Sonic universe. Chao were first introduced in Sonic Adventure.
A Sonic Chao is artificially intelligent. In fact, they are a virtually generated life form. Their role in the game is somewhat minor, merely being of use in minigames. The Chao is similar in function to the Tamagotchi in the respect that it is, in all reality, a virtual pet. However, they have a lot more on top to make them stand out with class. They will respond to any stimulus, they experience different moods and can either be loving or fearful of their owner. They also share similarities, however, as they do need feeding and looking after.
They aren't quite simply a minigame, as they do hold ties to the main game also. Items obtainable within the main game can be used to raise one's Chao. The collecting of rings can provide funding to buy them things while their are features in the main game unlockable for the Chao once an obstacle is overcome.
Chao also have statistics including Swimming, Flying, Running, Power and Stamina along with Luck and Intelligence. These are improved by your level of raising the Chao and will ultimately affect their performance in competition.
 Life Cycle
Like any living creature, the Chao has its own life cycle, beginning with birth.
 Egg Stage
This is the initial stage of the life for a Chao. Eggs, like Chao, are various in appearance and reflect on the sort of Chao which will hatch from it. To hatch a Chao egg, there are a number of ways one may go about it. You can gently rock the egg, throw the egg at a wall or just simply watch and wait. If you choose the cruel way of hatchery through throwing the egg, the Chao will not usually like the player but this can change through raising it. The left over shell pieces can be used in two ways; one being selling them for half the original price bought at or you can use them as hats.
No two Chao are quite the same, the raising of one can change so many factors as they all have different personalities and aspects. After a period of time, or when their stamina reaches level 16, a Chao will form a cocoon and begin the evolutionary process. Once the Chao comes out they will have matured, in fact they will be an adult, and they can now breed with other Chao. The Chao can evolve into a neutral adult Chao, a dark adult Chao, and a hero Adult chao.
The lifespan of a Chao is very different to that of a human, aging a year every 3-4 hours. Within 8 hours of the first transformation, the Chao shall undergo another. If the cocoon is pink then the Chao loved you dearly and shall hatch into a new baby Chao, if it disliked you the cocoon will be grey and ultimately, the Chao will die.
 Eternal Life - Chaos Chao
Raised in the right way, it's possible to have an immortal Chaos Chao, however this Chao cannot breed.
The cute species known as Chao made their first appearance in Sonic Adventure. Once their eggs hatched you could raise them to grow happy, healthy, and energetic. Also if you bought a Chao from the black market sometimes they can be in different colors like red, blue, green, even black. They can even be a shiny color. Chao could win medals by racing in Chao Racing mode. In Sonic Adventure 2 not only could you raise Hero and Dark Chao, you can make immortal chaos Chao. Also Chao Karate was introduced. If you unlocked items in racing mode, your Chao can learn to do cool things by going to Chao Kindergarten. With these skills your Chao can play instruments, plant trees, draw pictures, dance, swim, and more.
 Types of Chao
In the first game, Chao changed colour and shape depending on what stats were increased as they were raised. In Sonic Adventure 2 this was expanded on further to include 3 various types of Chao; Neutral, Hero and Dark. Hero Chao are raised by mostly caring for the Chao with either Sonic, Tails or Knuckles, Dark Chao are raised by mostly caring for the Chao with either Shadow, Dr. Eggman or Rouge. A Neutral Chao is one raised equally by both sets of characters.
 Chao Characters
There are currently 4 individual Chao characters: