SIP stands for Session Initiation Protocol, and it's used to send detailed information about how two endpoints, like phones, will communicate with each other. Though SIP is not just for phones. SIP is used to send Instant Messages, update statuses called “Presence” indicating if a user is on the phone or in a meeting, and establish complex scenarios like meetings and video calls. SIP utilizes other protocols to actually transmit the data, like RTP or Real Time Protocol for Audio and H.323 for Video, but SIP is the common mechanism for getting endpoints to agree on what's going to be used.
For example, a SIP message will send a message from one phone to another saying “I'm going to send you a phone call.”. The receiving phone says “Sure” and begins to ring. Once the phone is answered, SIP sends information saying “This is an Audio call, let's use RTP”. The receiving phone says “That works for me” and the call is established. A similar scenario works for video and instant messaging as well.
SIP is also used between phone systems for call routing. If one phone system does not know where to route the call, the system may send a SIP message to another system or a service provider saying “I don't have the destination for this call, can you please handle it?” The receiving phone system then says “Okay” and handles the call from there. In this scenario, the phone systems are acting as a back-to-back user agent, or basically a system that is not a phone but is handling a call.
So that's SIP. It's used in almost every modern communication system out there.
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