A firewall is hardware or software that inspects network traffic and allows or denies passage based on rules. It provides security between networks and protects local systems from network threats while allowing internet access. Firewalls can filter packets, monitor security events, and implement VPNs. They are limited as they cannot protect against all threats, like attacks that bypass the firewall or internal threats. Firewalls are classified by the protocol level they control, including packet filtering, circuit gateways, and application gateways.