Sparring is one of the most effective exercises inside of the martial arts for building technique, gaining conditioning and real world fighting skills. However it also has about the highest potential for injury of the different drills, this is where martial arts protective gear comes in to play.
Protective equipment in the martial arts comes in many different varieties, the core of which is sparring mitts and a mouthguard. These are the fundamental pieces of gear that no sparring session should be conducted without.
Past that we get into items such as body/limb shields and padding, head gear to protect the head. Shin and instep pads soften outgoing kicks and protect the legs alike. There is almost no limit to the amount of gear you can wrap yourself in and there are advantages and disadvantages alike to different levels of gear.
In general the more protective gear you wear the harder you can go in your sparring and the closer it becomes to a real world fight. Naturally there are advantages to being able to train harder without risk of injury but there are also advantages to wearing less protective equipment. For instance the more gear you have on the more it will impede your natural quick and agile movement, which is in it's own way less like the "real scenario". Also when there is more potential for injury correct technique tends to be followed a bit more strictly rather than mostly being thrown out the door when you can throw blows around with reckless abandon. This tends to provide practitioners with more technical martial arts skill and more control.
In the end there is no absolute right and wrong way to go about it, the best bet is a combination of both. Have some sparring sessions where you get on all the protective gear you can and really have at it and then have other sessions with a smaller amount of gear (still should wear sparring mitts and a mouthguard at the minimum though) and learn more control and technical skills. This is the best way to truly developing rounded skills that will serve you well in both the artistic side of the martial arts and also on the street.
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