Paper prototypes are just what they're called. Prototypes. Made from paper. Or made from any other handy, inexpensive, discardable material: cardboard, foam core, pencils, paper clips. Don't spend a lot of time on any one prototype, because the idea is to make something quick to communicate an idea. Maybe just to communicate it to yourself.

The advantage of paper prototypes over sketches is that you can interact with your idea. Are the parts the right size or in the right place? Does it fit in your hand, or sit on a table, or mount to your bike frame the way you thought it would?

Paper prototypes can be 2 dimensional or 3 dimensional. The 2D kind are useful when designing 2D products such as screen interfaces; the 3D kind are useful when designing more tangible products.