What is VoIP and How Does VoIP Work? A Complete Review

Ever wondered why landlines have almost disappeared these days? Why would businesses around the world abandon the traditional phone system, which once served as a backbone for communication?

The answer is straightforward –VoIP. It saves businesses up to 60% on communication costs.

Voice over Internet Protocol (VoIP), broadly termed IP telephony or broadband telephony, is a technology used for Internet-based voice communication. To understand how this works, let’s explore the science of VoIP.

🔑Key Takeaways

• VoIP is a technology that enables users to communicate over the internet instead of traditional phone lines
• Voice over Internet Protocol allows you to make calls over the Internet, reducing costs and increasing efficiency

• VoIP converts analog inputs into digital packets, which are then sent over the Internet and transformed into audible sound
• It is perfect for businesses of all sizes; VoIP adapts to changing needs
•  VoIP is evolving with AI, 5G, and UCaaS integration
• Ensure a stable internet connection and robust security measures for optimal performance

What is VoIP?  

Also known as Voice over IP, VoIP is a communication technology that enables users to make audio calls using a broadband internet connection instead of a traditional public switched telephone network (PSTN). It converts audio signals into digital data packets, which are transmitted via the Internet. 

A VoIP setup primarily consists of an

• Internet router
• Regulated power supply
• VoIP-compatible hardware

 Hardware such as handsets, business phone systems, or even traditional phones with an Analog Telephone Adapter (ATA) can transmit audio messages using the Internet. 

VoIP allows for cost-effective calls, often at lower rates than landlines or mobile phones. It also offers additional features like video calling, voicemail, and conferencing.

Popular applications of VoIP include Skype, WhatsApp, and Zoom, making it a widely used method for personal and business communication.

History of VoIP

The foundation of VoIP dates back to the mid-1960s when the first proposal of linear predictive coding (LPC) was made. 

However, VoIP only emerged in the mid-1990s as a cost-effective solution for international calls with the release of Vocal Chat, a commercial packet voice communication software from Vocal Tec. Until then, its applications were limited to personal communication only. 

Over time, advancements in broadband technology, along with the evolution of smartphones, made VoIP a major communication tool.

How Does VoIP Work?

VoIP technology operates by converting analog voice signals into digital signals before transmitting them over the internet. Once the data reaches the recipient’s end, the VoIP gateway reassembles it into audio signals. The gateways on each end allow signal conversion and packetization due to which the traditional landlines can also be integrated into the VoIP systems.

Now, let’s explore the whole process in greater detail:

1. Audio Signal Conversion

When a microphone or any VoIP-enabled device detects sound, the following happens:

• Analog-to-Digital Conversion (ADC): Analog sound waves of the user’s voice are captured and converted into digital signals using an ADC.
• Voice Compression (Codecs): Specialized codecs (compressor-decompressor), such as G.711, G.729, or Opus, compress the voice data to reduce bandwidth usage without significant loss in audio quality.

2. Packetization 

The compressed digital voice is segmented into small packets, which include:

• Payload: The actual voice data.
• Header: Metadata such as source and destination IP address, sequence numbers, and timestamp information. 

The headers make sure that the packets can be correctly identified and reassembled in the proper order at the destination. 

3. Transmission Over IP Networks

 The packets are transmitted via the IP.

• UDP Protocol: Most VoIP systems use the user datagram protocol (UDP) for faster data transmission, as it doesn’t wait for acknowledgments like transmission control protocol (TCP) does. 
• Routing: Routers direct packets through various network nodes to reach their destination. The path taken by each packet may vary, optimizing for speed and efficiency. 

4. Jitter Buffers and Error Handling

During transmission, packets may arrive out of order or experience delays due to network congestion. To address this: 

• Jitter Buffers temporarily store packets and ensure they are played back in the correct sequence. 
• Packet Loss Concealment (PLC): Algorithms compensate for lost packets to maintain call quality. 

5. Decoding and Playback

 Once the packets reach the recipient:

• Reassembly: Packets are reassembled based on sequence numbers. 
• Decompression: The codec decompresses the digital data back into audio. 
• Digital-to-Analog Conversion (DAC): The digital signals are converted to analog signals and played through the recipient’s device speaker using a DAC. 

6. SIP Protocol for Call Management  

The Session Initiation Protocol (SIP) is often used to establish, manage, and terminate VoIP calls. SIP handles tasks such as: 

• Call Setup: Initiating a session by signaling the recipient’s device.
• Session Management: Maintaining the call, including transfers or conferencing. 
• Call Termination: Ensuring a clean disconnection of the session.

Types of VoIP Systems

Different types of VoIP systems based on hosting:

I. Hosted VoIP

• Managed by a service provider.
• Requires no on-site infrastructure, making it ideal for small to medium businesses.

II. On-Premises VoIP

• Hosted on local servers.
• Offers greater control but requires a significant upfront investment.

III.Hybrid VoIP

• Combines hosted and on-premises solutions.
• Provides flexibility and gradual transition to cloud-based systems.

Here are four major types of VoIP, categorized based on their most common applications and usage:

I.Cloud-Based VoIP

• It is hosted on cloud servers, which eliminates the need for on-site hardware. 
• Example: Dialaxy, Grasshopper

II.Mobile VoIP

• It can be accessed through mobile apps making it ideal for on-the-go communication.
• Example: WhatsApp, Skype.

III.Business VoIP

• It is tailored for businesses of all sizes, offering advanced features like virtual phone systems, call management, and CRM integration. 
• Example: RingCentral.

IV.Residential VoIP 

• It is designed for personal use, often as a replacement for traditional landlines, as they are more affordable. 
• Example: MagicJack.

📝Note: Most of the VoIP platforms mentioned above are multipurpose.

What are the Top Features of VoIP?

Wondering about what can be the attractive features available with a cloud-based business phone system? Here are the most popular VoIP features:

1. Call Forwarding: 

This feature redirects incoming calls to another number or device, ensuring no call goes unanswered.

Users can set rules for forwarding calls to their mobile phone, colleague’s desk, or even voicemail if unavailable.

Imagine stepping out of the office—you can forward all incoming calls to your mobile so you remain accessible no matter where you are.

1. Voicemail-to-Email:

VoIP systems convert voicemail messages into audio files or transcriptions and send them to your email.

When someone leaves a voicemail, you receive an email with the message as an attachment or text.

Picture this: you’re in a meeting and miss a call. Moments later, you find an email with the voicemail transcription, letting you quickly know its urgency.

1. Video Conferencing: 

VoIP platforms often include high-quality video conferencing with screen-sharing capabilities.

Participants connect via a VoIP app or browser, enabling real-time communication through video and additional collaboration tools.

A remote team can use a VoIP app to discuss project updates, share their screens for feedback, and brainstorm using built-in tools like whiteboards.

1. Call Analytics:

VoIP systems provide insights into call data, such as duration, frequency, and customer interaction trends.

Analytics dashboards display metrics that can be used to monitor performance or improve customer service strategies.

You can use analytics to identify peak call times and allocate more agents during those hours to reduce wait times.

1. Integration with Other Tools: 

VoIP systems integrate with CRMs, email platforms, and other business software to ease workflows.

Integration allows users to manage calls, log interactions, and access customer information directly from a single platform.

With VoIP integration, you can make calls, log customer notes, and update profiles—all without switching between apps

1. Auto-Attendants: 

Auto-attendants act as virtual receptionists, directing callers to the appropriate department or individual.

Callers hear a menu, such as “Press 1 for Sales, 2 for Support,” and are routed based on their selection.

If you don’t have a dedicated receptionist, you can set up an auto-attendant to ensure every call reaches the right place, even during non-business hours

1. Scalable Plans:

VoIP services allow businesses to easily add or remove lines and features as they grow or downsize.

Providers offer flexible subscription plans that can be adjusted based on current needs.

If you are starting small, you can begin with a basic plan for a few employees. As your team grows, upgrade to add advanced features or accommodate more users effortlessly.

1. Advanced Security Features

The internet is prone to security breaches. Any call made over the internet needs to be secure.

VoIP providers prioritize secure communication to protect sensitive data from breaches or unauthorized access. Some advanced security features include:

• End-to-End Encryption

Encrypts call data during transmission to prevent unauthorized access.

• Multi-Factor Authentication (MFA)

Adds an extra layer of security by requiring both a password and a verification code.

• Call Authentication

Verifies the legitimacy of incoming calls to prevent fraud and spoofing.

• Intrusion Detection Systems (IDS)

Monitors the network for unusual activity and alerts you to potential security threats.

• Secure Data Storage

Stores sensitive data, like call logs and voicemails, in encrypted formats to ensure protection.

Advantages of VoIP

1. Cost Savings: Significantly reduces costs for local and international calling by up to 50%. Maintenance on sight and repair costs are also reduced greatly.
2. Scalability: You can add or remove users without expensive upgrades. This helps to adapt quickly to changes in workforce size.
3. Remote-friendly: VoIP can be used from anywhere with an internet connection. Additionally, it works across various devices, including desktops, laptops, and smartphones.
4. Advanced Features: It offers premium features like auto attendants, call recording, and call queues. Businesses do not need to install expensive add-ons to access features like video calls, conference calls, and virtual phone numbers.
5. Productivity Boost: Streamlined communication improves collaboration and efficiency.

Disadvantages of VoIP

Dependency on the internet also means that VoIP is prone to malicious activities like hacking, eavesdropping, and other forms of cyberattacks. 

Additionally, its need for a reliable internet connection and power supply can make it even less reliable.

Call quality is likely to be affected if the network is congested and any issues with the following occur:

• Latency
• Bandwidth 
• SIP ALG issues
• Packet Loss
• Jitter

If these are checked during the VoIP setup process, it’s smooth sailing after that.

🔗You might also read: Top Cybersecurity Tools to Protect Your Business in 2025

VoIP vs Traditional Phone Systems: Key Differences

The main factor setting apart these two technologies is the means by which signal transmission occurs.

While the traditional landline relies on PSTN, which uses dedicated copper wire to transmit analog signals, VoIP, on the other hand, uses packet switching to transmit voice data over the Internet. 

This makes VoIP superior in terms of versatility, scalability, and cost-effectiveness.

Here are the key differences:

Parameter	VoIP	Landline
Technology	Internet Protocol, digital signals	Physical wires, analog signals
Cost	Low (minimal hardware)	High (hardware intensive)
Reliability	Dependent on internet and power outages	More reliable
Mobility	Flexible	Limited
Facilities	Offers advanced features like virtual numbers, video conferencing, and integrations with other business applications.	Basic features include call waiting, caller ID, and voicemail.
Suitability	Perfect for businesses of all sizes with a desire to automate processes and increase outreach.	Ideal for businesses prioritizing reliability and security over growth.

🔗Related article: Hidden Costs of Traditional Phone Lines: How Virtual Numbers Save Money

How to Choose the Right VoIP Provider?

While most providers may provide decent services on the basic front of VoIP, choosing a VoIP provider that best suits your needs is essential.

Here are the key factors to consider when choosing a VoIP provider:

1. Pricing and Plans

Evaluate the cost-effectiveness of the provider’s plans, including setup fees, monthly charges, and additional costs for advanced features.

Consider:

• Do they offer flexible plans to match your budget?
• Are there hidden fees for upgrades or international calls?

2. Call Quality and Reliability

Ensure the provider offers high-quality calls with minimal latency, jitter, and packet loss.

 Consider:

• Do they have data centers close to your location for better performance?
• Are there guarantees for uptime (e.g., 99.9% SLA)?

3. Security Features

Look for robust security measures to protect your communication and data.

 Consider:

• Do they provide end-to-end encryption, multi-factor authentication, and intrusion detection systems?

4. Scalability

Choose a provider that can grow with your business by offering scalable plans and features.

 Consider:

• Can you easily add new users or services as your business expands?
• Are upgrades easy and cost-effective?

5. Features and Integrations

Examine the range of features offered and the ability to integrate with your existing tools.

 Consider:

• Do they offer key features like voicemail-to-email, video conferencing, auto-attendants, and call analytics?
• Can it integrate with CRMs, project management tools, or email platforms?

6. Customer Support

Reliable customer support is critical for resolving issues quickly.

 Consider:

• Is support available 24/7?
• Do they offer multiple channels (phone, chat, email) for assistance?

7. Device Compatibility

Check whether the provider supports the devices and platforms you use.

Consider:

• Can you use the service on mobile phones, desktops, and VoIP phones?
• Is the software compatible with operating systems like Windows, macOS, Android, and iOS?

8. Mobility and Remote Access

VoIP should support reliable communication for remote users.

Consider:

• Does the provider offer mobile apps or browser-based access?

9. International Calling Options

If your business deals with international clients, ensure the provider offers competitive rates and reliable service for global calls.

 Consider:

• Are international call rates reasonable?
• Do they provide local numbers for different regions?

10. Trial Period or Demo

Many providers offer a trial period to test their services before committing.

 Consider:

• Do they allow a free trial or demo to assess call quality and features?
• What are the cancellation terms if the service doesn’t meet your needs?

Considering these factors will help you choose a VoIP provider that aligns with your communication needs and business goals.

Future Trends in VoIP

As technology evolves, VoIP is set to adapt to emerging innovations. Here are the top trends:

AI Integration

AI-powered features like call sentiment analysis, real-time transcription, and intelligent call routing are expected to grow by 35% by 2025.

5G networks

VoIP systems will improve in speed and quality as 5G networks roll out globally. This will lead to more sophisticated VoIP apps that can provide faster data speeds and reduced latency.

WebRTC

WebRTC is an open-source JavaScript API that allows users to make phone calls, video calls, and text messages through web browsers or mobile applications.

Increased Adoption in Academic Settings

VoIP technology is being used more and more in schools as more people learn online.

Other future trends in VoIP include: 

• Quantum technology driving VoIP security enhancements
• Increased adoption of Unified Communications (UC)
• Adoption of SIP Trunks
• Growth of Video Conferencing
• Emergence of New Voice Codecs
• Increased Adoption of VoIP by Small and Medium Businesses (SMBs)
• Internet of Things (IoT) Integration
• Unified Communication as a Service (UCaaS) integration.

VoIP is not just a technology but a vital tool for businesses seeking modern communication solutions. As technology evolves, VoIP is set to adapt to emerging innovations.

So, make sure to keep up with the evolving tech. Switch from traditional traditional phone system to a VoIP business phone system now and get the most out of your investment. Join Dialaxy for seamless, modern communication.

Some Technical Terminologies

•  G.711: A narrowband audio codec originally designed for use in telephony that provides toll-quality audio at 64 kbit/s.
•  G.729: An audio data compression algorithm for voice that compresses voice audio in chunks of 10 milliseconds, operating at 8 kbit/s.
•  Opus: A versatile audio codec designed for interactive real-time applications over the Internet, supporting a wide range of audio applications, including VoIP and streaming.
• User Datagram Protocol (UDP): A lightweight way of sending data across the internet quickly but without ensuring it arrives perfectly
• Transmission Control Protocol (TCP): A reliable way of sending data over the internet, ensuring it arrives correctly and in order.
• Jitter: Variations in the delay of receiving data packets during online communication, which can affect call or video quality.
• SIP Trunks: Virtual phone lines that allow businesses to make calls over the internet using the SIP (Session Initiation Protocol) standard.
• Unified Communication as a Service (UCaaS): A cloud-based service that combines communication tools like calling, messaging, and video conferencing in one platform.

FAQs

What is VoIP, and how is it different from a traditional phone?

VoIP allows voice communication over the internet, while traditional phones rely on analog signals and dedicated lines. VoIP is more versatile and cost-efficient.

How much bandwidth does VoIP require?

VoIP typically needs at least 100 kbps per call. Higher bandwidth ensures better call quality.

Is VoIP secure?

Yes, when encryption and strong security protocols are implemented, VoIP can be highly secure.

Can I keep my existing phone number with VoIP?

Most VoIP providers support number portability, enabling you to retain your current number.

What equipment is needed to set up VoIP?

You’ll need an internet connection, a VoIP-enabled device (phone or adapter), and a service subscription.

What are the best practices for managing a VoIP system?

Ensure regular software updates, monitor call quality, use network prioritization for VoIP traffic, and train your team for efficient use.