What is "Protect Encrypted Data"

It is asking whether you want to require a password when you turn the phone on
 
Your phone has been set to encrypt its data. Once the phone has been unlocked, data is unencrypted when requested by apps. So to encrypt your data and then not use a screen lock to protect access, defeats the whole purpose of encryting the data.
 
Think of it as the pre-boot BitLocker password on Windows. When enabled, immediately after the bootloader completes, you're prompted for your unlock pattern. Only after the pattern is given will Android OS boot. It's kinda like a "keep the authorities off my phone" setting. Once powered off, even access to the filesystem from things like ADB is impossible until the pattern is supplied.

- Dave
 

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