I'm in the process of making my own Protoshield and looking at other designs I see people have used 1uF Capacitors between 5V and Gnd. I don't understand what's going on - why doesn't this cause a short circuit?
Capacitors are not short circuits to DC voltages, they are a short to AC voltages or noise and that's why you put them in. Look up "decoupling capacitors" on Wikipedia.
Digital devices cause a significant amount of noise due to their digital nature. It is typical to see a recommendation of a 0.1uF capacitor across power and ground on a digital IC as near as practical to the device in order to reduce noise in the rest of the system.
At DC a capacitor is an open circuit. The symbol for a cap actually show this.