I was BIG into Dreamcast homebrew and backups before the Xbox 1. I still play my DC regularly (I actually played through Rez just last night)
Anyway Modchips are not required.. here is a little history less on how Dreamcast security works:
If you flip over an original Dreamcast disc you'll see 2 distinct rings in the data... the Inner ring is regular old CD formatting and the outer ring is "GD" or Gigabyte-Disc formatting Which is half way between a CD and a DVD in terms of how it stores data.
The idea was that developers could put things like computer wallpaper, videos music and other things on the CD portion of the disc (and many actually did).
The boot sector was also located on the CD portion of the disc. What would happen is when a game was launched it would read the boot sector in the regular cd formatting and the last instruction before the game was actually launched was for the disc drive to switch over into GD rom mode.
Like many fools before them Sega assumed that by using a format that wasn't offered in a recordable format encryption and other security systems were not needed and that the format of the disc alone would protect them.
What the Utopia team did was rip the boot sector from a game raw and they were able to isolate the exact moment where it told the laser assembly to switch to GD rom mode and simply stripped it out. The result was a universal boot sector that could be used to boot ANYTHING on the console.
At this point people had already figured out how to rip the discs by way of a coder cable using the Dreamcast's Serial port or by custom PC drives. Later in it's life they would also rip them using the rare broadband adapter.
I believe the latest version of the boot-loader was 1.2 but I could be wrong.
Soon after the boot loader people realized that using the Disc Juggler burning application they could write mixed mode CDs which would allow them to incorporate the bootloader into the same disc as the backup or homebrew... there are tools out there to help you create ISOs for theses "Self Boot" discs.
Since the Dreamcast discs could hold up to 1GB of game data and even the largest CDs were tapped out at 800MB Many images had to be prepped quite a bit for them to work.
Some tricks included
-Stripping out foreign language FMV, Audio and Sub titles
-Stripping out demos
-Re encoding audio tracks to a lower bit rate or changing them from stereo to mono
-Re encoding Video tracks to a lower bit rate or resolution
Or in some extreme cases stripping out all video or audio files completely
The Most difficult game to backup was D2 since the game was huge and spanned 4 discs originally. someone did finally figure out a way to back it up though and basically utilizes a rare 900MB CD-R that is only compatible with certain burners and there are 2 disc 3s since the game content was split up across these two discs there is a point where you'd have to pause and switch over.
Interesting enough D2 despite being a really crappy game now fetches $100+ on ebay and the like because of the large amount of people who "collect" Dreamcast games by way of piracy being unable to find images for that game... so they buy it to complete their collection and this has driven the price way up.
I did actually own the game at one point and I played through and beat it too... I sold it on ebay for $12 when I was done
I regret that now considering it's value.
Some games cannot be setup to self-boot because of their size... the boot code does take up some space and there are a handfull of games where that couldn't be squeezed in. Other games like Alone in the Dark had 2 versions of the last disc... one with the ending FMV stripped out and one with a substantial portion of the game code stripped out with the idea that when you got to the end you would save it and switch discs.
... all of these games could be made to fit on an 800MB CD though D2 was the only one that wouldn't.
As for homebrew there is LOTS for the Dreamcast... in this regard the Dreamcast truly was the predecessor to the Xbox 1 since many of the homebrew developers there migrated to the Xbox. Genesis emulation on the Dreamcast is flawless since Sega released an official emulator with a handful of classic games and hackers were able to strip it down and created an ISO where you could insert your own roms. A version of the Playstation emulator BLEEM! was also released for the dreamcast under the name Bleemcast, and while it was originally designed to only work with certain games hackers again stripped it out and made it so you could burn your own playstation 1 games in a dreamcast bootable format. Bleemcast had to be configured specifically for each game though, there was a community devoted to writing bleamcast config files for the most popular of the playstation games. IIRC they had about 50 or 60 games that they were able to get running flawlessly.
DC Linux was very popular, and like the Xbox consoles the controller ports were just misshapen USB ports... I believe there was even a 3rd party IR remote that was released at one time with an disc that allowed you to boot MP3 discs or VCDs....
the problem with these things is that the DC had no storage space so while you could make a cheap Linux web server the reality was that any changes that needed to be made to the website would require recompiling and burning a new disc... this plus the fact that Broadband adapters were expensive and hard to find meant that while the console was capable we never saw something like an XBMC on it.
Even still the DC runs Windows CE and supports keyboards and mouses natively so it's easy to develop for and there are lots of great homebrew games for it too.
There was actually a modchip released for the DC but all it did was allow you to boot original import discs. It was a simple 4 wire PIC chip.
Late in the DC's life Sega released a new version in Japan that somehow blocked the bootloader and self boot discs... IIRC this never effected the US consoles and only a very small portion of the consoles in Europe and Japan. AFAIK no one ever bothered to crack it because it was easy enough to just find an older console to hack if you wanted one.