VoIP (Voice Over IP) allows users to make phone calls using an Internet connection rather than a traditional phone line. It works by converting voice signals into digital data packets which are transmitted over the Internet or other IP-based networks. Common protocols used for VoIP include UDP, RTP, and SIP. While VoIP provides advantages like lower costs, it also faces challenges of packet loss, latency, jitter, and firewall restrictions that can impact call quality.