Performance testing is a type of non-functional testing used to identify a system's response time, throughput, reliability, and scalability under given load conditions. It helps understand how a system will behave under extreme loads, identifies constraints, and which parts may misbehave in real-time. There are different types including baseline, benchmark, load, stress, endurance, and volume testing. JMeter is an open source tool commonly used for performance testing as it can simulate heavy loads and provide instant visual feedback. Key challenges include accurately simulating high user loads, implementing real-life usage scenarios, accounting for network latency, testing certain systems like chat servers, and reducing the time needed for metrics collection and report analysis.