Skeletal animation is a technique where a 3D character is represented by bones (rig or skeleton) and a surface mesh. The skeleton is hierarchical and controls the deformation of the mesh. The process involves creating a skeleton, rigging it to the mesh, setting keyframes to define poses over time, and outputting the animated 3D character. Skeletal animation allows for dynamic and natural movements using bone transformations and is simpler for creating multiple animations for one character compared to traditional animation. However, it requires more processing power and complexity compared to other animation methods.