Parameter expansion replaces variables with their values as an evaluation phase of a command in most Bourne-derived shells.
Parameter expansion is one of the series of transformations that commands go through when evaluated in a shell.
Its main function is to interpolate parameters, a.k.a. shell variables, but it also allows for some manipulation. For example, in bash, assuming variable var contains the string 1234abcd:
$varexpands to1234abcd${#var}expands to the parameter's length,8${var%cd}expands to the parameter tail-trimmed ofcd:1234ab
Section parameter expansion from bash's Reference Manual