The Knightfall Protocol

""I liked the very end! When Batman is left with no other option, he still manages to find a way out. To become an even more badass version of Batman. How cool is that?""

- Sefton Hill, during a Reddit AMA event The Knightfall Protocol was a contingency plan devised by Bruce Wayne in the event that his identity as Batman was compromised.

Before Arkham Knight Incident
In preparation for the Protocol's use, explosives were set up in every room of the Manor.

A month after Deadshot and Batman's investigation into Stagg Industries, Alfred and Bruce were at the Wayne Plaza. Alfred gave him an update on the Protocol, telling Bruce that the workmen had installed piping all the way down to the foundation of the Manor as requested. Bruce thanked him, saying that he hoped the Protocol would never have to be used, but that its existence was necessary to protect Tim Drake, Dick Grayson, Barbara Gordon, and Alfred Pennyworth.

Arkham Knight Incident
(Unlocked by: Complete City of Fear, and all 14 of Gotham's Most Wanted side missions [excluding Season of Infamy])

After his unmasking at the hands of Scarecrow, Batman eventually returned to the GCPD Lockup and took one last look of the city he had sworn to protect. As the Batwing arrived carrying the Batmobile, he entered the cockpit, remotely detonated the Bat-Signal, and headed towards Wayne Manor, now surrounded by several reporters (Including Vicki Vale). Bruce, however, ignored all of them, knowing that the only way to protect his loved ones and the people of Gotham City from all the villains he had angered throughout the years, was for Batman to disappear for good. As he got closer to the front door, Alfred opened it and asked if Bruce really wanted to proceed with his plan. Mere seconds after entering Wayne Manor, most of the building detonated, apparently killing Bruce and Alfred — It was never revealed if they survived the blast.

Commissioner Gordon, now the Mayor of Gotham, stood by the now destroyed Bat-Signal smoking his pipe while narrating a speech about crime, and how Batman's sacrifice allowed the people to live relatively normal lives. He wondered, with Batman dead, who would take his place in protecting Gotham's citizens. In an alleyway on Miagani Island, two Thugs ambushed a family of three similar to how Bruce's family was robbed. The older man of the family was knocked unconscious by one of the thugs, who told the other one to take his wallet, after which he noticed what appeared to be Batman standing on a nearby roof. One of the thugs taunted this figure, telling it that Batman was dead and how they were not afraid of him anymore. However, the thugs lost their confidence as the figure started to rise above the rooftop, and expanded to a fiery bat creature that released hundreds of bats on the thugs and dashed towards them and the screen.

After Arkham Knight Incident
Several thugs and super-villains alike commented on Batman's death, confirming that the majority of them knew about his apparent death.

Explanations/Theories
Due to the ambiguous nature of the ending, there are several theories on what the ending truly meant:
 * Batman faked his death: The most accepted theory, and supported by the developers. This theory is widely accepted as Bruce Wayne strictly follows the "No Kill" code (in principle), so it is unlikely that he would have caused Alfred to die. Due to the mansion's almost total destruction, many of Gotham's citizens would understandably believe Bruce Wayne died in the explosion. According to this theory, Bruce and Alfred retreated into the Batcave before Wayne Manor's destruction, and went into hiding. Likewise, the bat-figure in the extended ending is believed to be Bruce.
 * Hush became a scapegoat: Like the first theory, Thomas Elliot hated Bruce Wayne so much, and he tried to take away all WayneTech funds. Because Bruce Wayne could not bring him into GCPD, as it will lead to confusion to police and thugs. But luckily he can be a body double or a decoy to fool them, so the world would believe that Bruce Wayne was really dead without knowing the body belongs to Thomas Elliot, Since Thomas Elliot had alter his own skin DNA.
 * Another person took the identity of Batman, regardless of Bruce's fate: Others believe that someone else took over Batman's old identity, basing this theories on various other Batman stories.
 * Azrael. Due to his brief stint as Batman during the Knightfall story arc, and his plans to follow Batman's footsteps. Potentially possible if the player let Azrael go during his side mission, otherwise this seems unlikely.
 * Jason Todd, Dick Grayson or Tim Drake. Since the Arkham Episodes set after the main campaign show that they continued crimefighting in their existing alter-egos makes this unlikely.
 * Some have suggested that Terry McGinnis (Batman Beyond) continued Bruce's legacy. Very unlikely, as there's no evidence that Terry even existed in the Arkhamverse.
 * Damian Wayne, but again, there's no evidence of his existence in the Arkhamverse other than Talia al Ghul's remark in Batman: Arkham City, and even then, Damian would not be old enough, since Bruce's one-night stand with Talia must have happened in the last ten years.
 * Jim Gordon, since he had, in fact, taken up the mantle in the comics, and he was the one who said that Gotham needed a new savior. However, since he is seen sitting in his limousine just minutes prior, he's also an unlikely candidate.
 * Whoever the new Batman is, he is believed to have access to Scarecrow's Fear Toxin, due to his appearance matching Scarecrow's fear hallucination.
 * Batman is dead, and Gotham used Fear Gas to control criminals: Some believe that the city started using Scarecrow's fear gas to control criminals, dispatched throughout the city. Very unlikely, since it would affect the civilians as well.
 * Bruce Wayne is or isn't dead, the ending was figurative: Another possible meaning is that, following Bruce's disappearance, the citizens of Gotham were inspired by his sacrifice and fought back against crime, unlike Thomas and Martha Wayne. The family at the end could be a metaphor for Bruce's family, as the mother at the end had the same necklace as Martha Wayne and they were going out of a movie theater. The giant bat was a metaphor for someone coming in to stop the thugs and save the family. The citizens fighting back against crime would allow Tim and Barbara to get married without any issues and would fulfill Batman's mission of not letting another 8-year old boy lose his parents to crime. The Arkham Episodes confirm that the ghost is a physical entity and actually exists, so this theory is unlikely as well.
 * Batman in the ending cutscene is a figment of the thug's mind, and a result of exposure to Crane's new Fear Toxin: As was said throughout the game and experienced by Batman, exposure to the Fear Toxin caused long-term psychological damage. Since the only people in Gotham at the time of the Cloudburst's detonation were criminals, it's possible that it might manifest itself in criminals as Batman appearing whenever they are doing something and fear Batman would arrive, like Batman's visions of The Joker, but more terrifying as the criminal's fear of Batman was different from Batman's fear of turning into Joker. Again, the ghost is a physical entity, largely invalidating this theory.

Aftermath

 * Nightwing continued to fight crime in Blüdhaven, with the help of Lucius Fox. Presumed acting GCPD Commissioner Cash offered to build a Nightwing signal on the roof for when they needed him but Nightwing declined, saying Blüdhaven is his city, but he will not abandon Gotham and will be there for emergencies.
 * Catwoman continued her life as a thief. Her assault on Riddler's base left her with all of Nigma's finances ($2.73 million).
 * Tim Drake and Barbara Gordon got married, but their honeymoon was disrupted by Two-Face's escape from jail. Tim came to terms that he is not Batman and with Barbara they resumed fighting crime together.
 * Red Hood turned his anger towards the criminals of Gotham, and later kills both Killer Moth and Black Mask (possibly). Afterwards, Jason continues his way of vigilance to Gotham criminals.
 * The Ghost, commonly believed to be Bruce, starts his career as a vigilante in Gotham.

Trivia

 * The Knightfall Protocol was very similar to Protocol 11, since both protocols involved failure to some degree: Knightfall for being the failure to keep Batman's identity a secret, and Protocol 11 for being the failure to stop any party that disabled Protocol 10 and when Hugo Strange lost. Also, both had explosions which may have resulted in death.
 * Commissioner Gordon repeats the line he said in the beginning of the game after Wayne Manor is destroyed. "This is how it happened, this is how the Batman died."
 * The Knightfall Protocol was foreshadowed several times in the game, as several thugs speculated Batman's true identity. Furthermore, after he saved Catwoman from The Riddler, Batman mentioned that he wasn't capable of protecting Gotham anymore, and that a new and more powerful legend was needed and would rise from the ashes of Batman, which implied that Bruce already had a replacement in mind for the Knightfall Protocol. Furthermore, after he caught Penguin with Nightwing, Bruce said that he was proud of Dick and wanted him to promise that he would keep Blüdhaven safe and told him that after tonight, they would never see each other again, which implied that he didn't choose Dick to be his replacement. This lines up with the comics as Batman sees Dick as his own hero and not in the shadow of Batman.
 * Batman was notorious for faking his death in other media, such as The Dark Knight Rises, where he faked being killed in a nuclear explosion while Bruce Wayne was apparently killed during the riots in Gotham. In the classic comic/animated movie adaptation, The Dark Knight Returns, he faked a fatal heart attack. Bruce also faked his death in Batman: The Animated Series in the episode: "The Man Who Killed Batman" by faking his death via explosion, and possibly hinted at his true fate.
 * Calendar Man was seen in the crowd during the Knightfall Protocol. Some report that Lex Luthor appears as well, but it's unconfirmed.
 * Calendar Man's presence was a callback to his claim in Arkham City that he would be present at Batman's end.
 * If Bruce did indeed die in the explosion, his death shared some similarities with Joker's death: they were both overwhelmed and worn down by something from their past (Joker with Titan and Batman with Jason Todd/Scarecrow), and were both responsible of their own deaths, with the other one involved. The main difference was that Joker's death was an accident caused by his greed and selfishness, while Batman's death was a selfless act to protect his allies.
 * Subtitles identify the thugs as belonging to Two-Face's gang.