After the recent Target hack there has been talk about moving from credit cards with magnetic stripes to cards with a chip.

In what ways are chips safer than stripes?

You can't clone the chip.

A magnetic strip holds a secret number, and if someone knows that number they can claim to be the owner of the card. But if a bad guy swipes the card, they then know the number, and can make their own card, i.e. "cloning". This has turned out to be a major practical problem with magstripe cards.

A chip also holds a secret number. However, it is securely embedded in the chip. When you use the card, the chip performs a public key operation that proves it knows this secret number. However, it never reveals that secret number. If you put a chipped card in a bad guys machine, they can impersonate you for that one transaction, but they cannot impersonate you in the future.

All of the above assumes that the implementation of the chip is good. Some chips have been known to have implementation flaws that leak the secret code. However, chip and pin is now pretty mature, so I expect most of these issues have been ironed out.
