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 finding defects early. Benefits include more modular, flexible code and increased productivity, while shortcomings include reliance on unit tests and potential for false sense of security. Designing for testability and managing tests is important for large systems.