Skeletal animation is a technique where a 3D character is represented by bones (rig or skeleton) and a connected mesh (skin). The skeleton is hierarchical and interconnected. Rigging involves placing bones in the correct positions corresponding to where they would be in a real skeleton. Keyframes define the starting and ending points of movement, and in-between frames create a smooth animation. The position of bones can be manipulated through transformations like rotation and translation to create poses at keyframes. Once the animation loop looks good, it can be output and used elsewhere. Advantages include simpler animation process and ability to create dynamic animations at runtime, while disadvantages include complexity and increased processing time.