The Firmata protocol allows communication between microcontrollers and software on a computer by exposing microcontroller control similar to an API. It works by having a Firmata client on the host computer communicate with a Firmata firmware on the microcontroller. This allows controlling an Arduino from many programming languages like Processing, Python, JavaScript, and more. Benefits include faster processing than on the microcontroller alone and ability to update firmware universally. Downsides include reliance on a separate device and potential latency issues.