5.3 ISDN BRI and DDR
5.3.6 Step 4 - setting the encapsulation protocol
When DDR (or a user) creates an end-to-end path over the ISDN, some method of datagram encapsulation is needed to provide data connectivity. Available encapsulations for ISDN designs are PPP, HDLC, and X.25. The X.25 encapsulation type can also be used for datagram delivery over the D channel. Most internetworking designs use PPP as the encapsulation.

The encapsulation ppp command can be used if you want PPP encapsulation for your ISDN interface. This is the case if you want any of the LCP options that PPP offers (for example, Challenge Handshake Authentication Protocol [CHAP] authentication) or if you want interoperability between routers from different companies, such as a Cisco router connecting to a router not provided by Cisco. You must use PPP, Password Authentication Protocol (PAP), or CHAP if you receive calls from more than one dialup source. To revert from PPP encapsulation to the default, use the encapsulation hdlc command.

Router(config-if)#encapsulation [ppp | hdlc]
Router(config-if)#ppp authentication [chap | pap