Mod chips were designed specifically for defeating a protection - it defeats the country code check which also serves as the protection for recogising an orginal PSX game CD.

It is not for recognising the media. There isn't a protection on the PSX to differentiate between a pressed CD and a CDR.

Without the mod chip your PSX game backup would not work because of the protection.

Libcrypt on the other hand is a second separate protection not related to the above.