Chaincode in Hyperledger Fabric is essentially smart contract software that defines assets and the transaction instructions for modifying these assets on the ledger. Chaincode functions as the business logic layer of the network, where the rules for interacting with the ledger are specified. It is executed on the network peers and is used to encode the policies and constraints associated with asset exchanges or updates within the business network. This setup allows organizations to automate processes and enforce consistency and compliance across transactions.