Stable Diffusion is a text-to-image generation method that utilizes diffusion models, specifically designed to convert text prompts into detailed images. It starts with a noisy image and through a process simulating diffusion, progressively extracts an image that aligns with the text description provided. This approach has revolutionized digital art and design by enabling the creation of complex, high-resolution images from simple textual inputs, competing with other generative models like GANs.