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The term CD key very likely comes from the fact that the key is usually on the case or the CD. Computer games use CD keys to verify that the game has been not been illegally copied; for example, one could not play Diablo II online without an original/unique CD key.
CD keys consist of a series of numbers and/or letters. This sequence is then passed to a verification function in the program. This function manipulates the key sequence according to a mathematical algorithm and attempts to match the results to a set of valid solutions.