does it bypass the eeprom on the xbox and boot off the chip instead?

Nearly there, it bypasses the TSOP (where the original bios is stored) and boots a hacked bios from the chip, this hacked bios allows the use of code not signed by M$

hmm and what about the eeprom? what is that for

its sort of like the xboxes internal serial number, it also contains region info

yeah i had the same questions about a modchip