To resolve the protection issues caused by high penetration of distributed energy resources, this paper proposes an efficient protection scheme for microgrids based on the autocorrelation of three-phase current envelopes. The proposed strategy uses a squaring and low-pass filtering approach for evaluating the envelope of the current signal. Then, the variance of the autocorrelation function is used to extract the hidden information of the distorted envelope to detect the fault signatures in the microgrid. Furthermore, the reactive power is used for determining the fault direction. The performance of the proposed protection scheme was verified on a standard medium-voltage microgrid by performing simulations in the MATLAB/Simulink environment (Version: R2017b). The proposed scheme was shown to be easy to implement and have good performance under looped and radial configuration for both grid-connected and islanded operation modes. The simulation results showed that the scheme could not only detect, locate, classify, and isolate various types of short-circuit faults effectively but also provide backup protection in case of primary protection failure.