The correct answer is Option 2: Provides effective thermal insulation to the pulp.

Calcium hydroxide is widely used as a pulp capping material primarily because it acts as an effective thermal insulator, protecting the vital pulp from temperature changes during restorative procedures. This insulation minimizes thermal irritation, which helps maintain pulp vitality. Additionally, its high pH creates an antibacterial environment thereby reducing the risk of infection. However, its most clinically significant role in pulp capping is to protect the pulp from thermal insults until dentin repair occurs.

Reference: Sturdevant's Art and Science of Operative Dentistry, 7th Edition.