Test-driven development (TDD) is a software development process where unit tests are written before code to define desired functionality. The TDD cycle involves writing a failing test, then code to pass the test, and refactoring code. TDD encourages simple code design and inspires confidence through comprehensive test coverage. Benefits include more modular, flexible code and catching defects early. Shortcomings include reliance on unit tests and potential for false sense of security. Designing for testability and managing tests is important for large systems.