“A chao is an artificially intelligent, virtually generated lifeform. 'Making their first appearance in Sonic Adventure for the Dreamcast' (both in the plot and in a chao raising aspect of the game), later in 'Sonic Adventure 2, and further enhanced in Sonic Adventure 2: Battle' and Sonic Advance, chao have recently come to be a large part of the 'Sonic franchise.” - ConfusedGuy‘s Chao FAQ
Chao are small, cute creatures of varying shapes and colors. They are intelligent and can be trained in such things as running, swimming, flying, power, and stamina. Though they act childlike, they are more intelligent than they first appear. They have not been shown to be able to talk, but can otherwise communicate through sounds and body language, since they’re very expressive.
Note: Chao raising, as it is here (according to the games), can become a bit complicated. Feel free to bend the rules for your own creative purposes.
Also see KiwiDreamweaver's Chao Adoptables!
Alignment
Chao fall under one of three alignments – Hero, Neutral, or Dark. This alignment is not inherited, but is determined by how the chao is treated in the first stage (“baby” stage) of its life. If treated well by Heroic characters, the chao will slowly fall into Hero alignment; if treated well by Dark characters, it will fall into the Dark alignment. Abuse will also push the chao into alignment, though in the opposite direction (for example, if a Hero character abuses a chao, it will favor the Dark side; if a Dark character abuses a chao, it will favor the Hero side). A chao becomes Neutral when it is treated equally by both types of character, or treated well by a neutral character, or left alone.
Alignment of a chao mostly decides how the chao will treat strangers – for example, if a Hero character approaches a Dark chao, the Dark chao will likely avoid or attack the character (while Neutral chao will probably remain passive no matter who approaches them). However, this can be overcome, and oppositely-aligned chao can become friends with any character – and enemies with any character.
Alignment also decides what certain chao will look like (see “Appearance”).
Age
Chao have three stages: Egg, Baby, and Adult.
A chao at the Egg stage will, of course, still be in its egg.
After it hatches, it will be in the second stage, a Baby chao. Baby chao have no skills (cannot swim or fly, must crawl until it learns to walk, etc) until they are taught these skills by a caretaker. This is the stage where the chao is most susceptible to change – where the chao’s caretaker will ultimately decide its alignment and first skill type (more on skill types later).
Between the Baby and Adult stages, the chao enters a cocoon (see below picture) and will come out an adult. When it emerges, its alignment will be set and cannot be changed; its first skill type will also
be set and cannot change.
The Adult stage takes up most of the chao’s life. This is the stage where most skill growth will take place, and in addition to its first type, it can acquire a second (see “Type”). It can also mate and breed in this stage.
Types
Mentioned above, there are five primary skills for chao: Flying, Swimming, Power, Running, and Stamina. Stamina is considered the “normal” stat (for a “normal looking” chao) since many chao tend to raise stamina the fastest and so evolve into stamina or “normal” chao.
When a chao is born, it has no set type, and will develop one during the Baby stage. This stage is also when it looks like the iconic chao – smallish wings, teardrop head-shape, round body. It may change gradually in appearance as it begins to take on a particular skill type, even before it enters its cocoon.
In its Adult stage, the chao will have acquired a first skill type already – either Running, Flying, Swimming, Power, or Normal/Stamina. In the Adult stage, the chao can acquire a second type – this will be its second-most powerful stat. For example, if a chao’s first and strongest type is Swimming, and it gradually develops the Power stat, it will become a Swimming/Power chao. The second type, however, is more fluid than the first type, and can change with time (for example, if the abovementioned Swimming/Power chao suddenly learns more Flying skill quickly and it overcomes Power, it would become a Swimming/Flying chao. However, the first skill type is not fluid – even if the Flying stat on this chao were to surpass the Swimming stat, the chao would remain Swimming/Flying. Finally, a chao can have two of the same ability types – if you have a Running chao, for example, and still only raise its Running stat the most, it would become a Running/Running chao (and be extremely fast and specialized at running).
The various type evolutions are the things that change chao’s appearances the most.
Appearance
Chaos’ general appearances are indicative of their alignment and skill types, as well as many other things. Get ready guys, this is going to be a long section.
Animal Parts
This is sort of an offshoot of appearance, but it’s so unique, it needs its own section. Chao acquire animal parts when they interact with baby animals (that is, not including anthropomorphic ones such as Sonic and friends). These parts are not genetic, and can be acquired at any time during the chao’s life. These parts, for example, can include:
and on, and on, and on.
More interaction with an animal means more parts and vice-versa.
Animal parts can be mixed and matched – for example, bunny ears, tiger paws, and a peacock’s tail. Interacting with small animals also means the chao can pick up certain behaviors – for example, a chao with tiger ears might also roar (or squeak, as the case may be) like a tiger.
These parts can be removed through interaction with “ghost” animals.
Talents
Chao are intelligent creatures; they can have hobbies and talents beyond flying, swimming, etc.
Popular ones include singing, drawing, dancing, and playing instruments.
Birth, Death, and Rebirth
All chao are born from an egg. At the end of a chao’s life, if treated kindly and cared for well, will enter a cocoon and be reborn into an egg instead of dying. This chao will be reborn the same color with some of its previous skills and memories, but it will be once again a baby chao, and can become any type of chao once again.
If abused, treated poorly, or ignored, the chao enters a cocoon one last time and fades away, never to return.
Also, it is possible to make a chao live forever, without having to go through the rebirth phase. When a chao is reborn as an egg for the second time, (Twice reborn, that means two of the cocoons that turn the chao back into an egg.) you can make it into a chaos chao. To make a chaos chao, give the chao all the animals before it makes a blue cocoon in its third life. If done correctly, when the chao makes its blue cocoon, it will become a chaos chao, and will live forever. If it does not become a chaos chao, don't worry! You can try again on the chao's next rebirth.
More Info
For more explanation about chao, try these links: