Huffman encoding is a variable-length encoding technique used for text compression that assigns shorter bit strings to more common characters and longer bit strings to less common characters. It uses a prefix code where no codeword is a prefix of another, allowing for unique decoding. The algorithm works by building a Huffman tree from the bottom up by repeatedly combining the two lowest frequency symbols into a node until a full tree is created, with codes read from the paths. This greedy approach results in an optimal prefix code that minimizes the expected codeword length, improving compression.