Chain code is a lossless compression technique that represents the coordinates of a continuous object boundary in an image as a string of numbers. Each number represents the direction of the next point along the connected line segment. Chain codes work best for binary images, representing them as a connected sequence of straight line segments based on 4 or 8-connectivity. The chain code provides a concise representation of a shape contour by describing each edge as a sequence of direction codes from its starting point.