Microchips are a logic tool in LittleBigPlanet 2 that players can use to expand the properties and actions of an object that it is placed on.
Microchips can be found in the "Gadgets" section of the Tools Bag, and can be placed on an object like any other sensor. Once placed, a circuit board will pop up, giving players the needed space to connect different logic together. The purpose of Microchips is to organize logic on an object, so the object itself would not have to be filled with tons of logic in order to get the desired results.
Any gadget can be placed on a Microchip, and it will automatically apply those properties onto the object on which it lays. For example, if you were to place the Danger Tweaker on a Microchip, then whatever object the microchip is on would become dangerous. Multiple Microchips can be placed on each other as desired, and can also be resized to fit the needed dimensions.
Besides the Microchip, only a select few objects in the game have circuit boards like the Microchip's circuit board - the Controllinator and the Sackbot. These act exactly the same as microchips, except the Controllinator contains the outputs required for button input to be used in your logic.