Chao are another species that inhabits the planet of Earth (game wise) just like Humans and the Anthro-Animals. Their deity is Chaos so presumably they have a relation to the Chaos Emeralds and the Master Emerald. The were considered the original Guardians of the Emeralds, though really they could do nothing to protect it.
Their metamorphic abilties?
Judging from Chaos having the ability to change form and shape and how the animals affect them, Chao likely have the ability to adapt to their surroundings by taking on the traits of the local wildlife. Sometime their physical appearance alters as well (example their heads change shape based on what abilities are their highest).
Also considering how bubbly the Chao are in Sonic Adventure and the fact that Chaos is a living liquid, it's possible that Chao aren't a completely solid being. This also would explain why they can resist being thrown and can take quite a wallop to the face (though too much of that does eventually kill them).