The I2C protocol, or inter-integrated circuit, is a two-wire serial communication method used for short-distance communication between microcontrollers and peripheral devices. Key features include multi-master and multi-slave capabilities, simple addressing, and effective error handling through ACK/NACK functions. Its applications range from interacting with sensors and memory ICs to controlling multiple microcontrollers, but it poses limitations in hardware complexity and operates as a half-duplex communication method.