Hardwired to the Omnitrix while Ben is transformed in order to keep him as that alien. In order to free up the Omnitrix to transform into another alien or have Ben turn back to normal, the microchip must be physically removed or destroyed. Basically, the chip's only function is to keep the Omnitrix from timing out.
In the episode Food Around the Corner, Ben as Gravattack, was elected to mediate peace talks between the Applolpexians and the Lewodans. Since Ben only knew the Life-Form Lock Code for Incuseans, he needed an alternate means to stay as Gravattack for the duration of the meeting. Blukic and Driba attach a microchip to the Omnitrix to keep it from timing out. However, due to Paltroon's betrayal and the Hulex fleas, Ben found himself in danger of vaporizing. Luckily, Rook had been shruken down to microscopic size and was able to destroy the chip, thereby allowing Ben to transform and averted the meltdown of Gravattack's core.
The microchip, once attached to the Omnitrix, will not allow Ben to transform until it is removed or destroyed. As a result, Ben is practically trapped in one alien form until the Omnitrix is released.
Driba also warned Ben not to get the chip wet, though the reason why was never made clear and did not matter after the chip was destroyed.