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The name says it all: software phone. Softphones are software applications that run on devices (laptops, smartphones, tablets etc.) with Internet connections and allow you to make and receive calls. Softphones are thus designed for Internet phone service, commonly known as Voice over Internet Protocol (VoIP), rather than traditional phone service.

A VoIP softphone is perhaps easiest to understand when compared to an IP phone i.e., a hardware office phone designed to make calls over the Internet using a business VoIP service rather than traditional land lines.

Both IP phones and softphones serve as endpoints to which VoIP phone systems connect calls, but one is software and the other is hardware.
Some businesses choose to deploy softphones rather than hardware phones as phone system extensions. For instance, if your employees work remotely, it makes more sense to connect the phone system to applications on their laptops than to desk phones in an office they rarely see.

Additionally, you can deploy softphones alongside desk phones and connect the same extension to both endpoints. This gives your employees more flexibility in their communications options.
Softphone-only deployments are gaining in popularity and can also help keep the costs of switching to VoIP down, since IP phones can be expensive.