What are eddy currents?

Eddy currents are, in general, stray currents of electricity that are created (by induction) in conductors. Any time a magnetic field "sweeps" or "moves across" a conductor, induction occurs, and tiny voltages (with their tiny currents) are set up. These currents, in turn, create small magnetic fields that oppose the magnetic field that induced the eddy currents in the first place. Said another way, any time a voltage is induced in a conductor, eddy currents flow and counter-electromotive force (counter emf or back emf) is induced which opposes the original field.

We sometimes have a little narrower view of things in electronics. In many applications, eddy currents are tiny currents in things where we don't want them and can do something to minimize them. In a transformer, the primary windings induce voltage in the secondary winding. The expanding and contracting magnetic field of the primary windings is said to "sweep" the secondary windings, and induction will occur. Voltage will appear in the secondary windings.

We often wind our transformers around cores of ferromagnetic material. This material "conducts" magnetic lines of force and makes our transformer much more efficient. But the the magnetic field that sweeps the secondary also sweeps the core, and it induces voltage there, too. (Even though we don't want it to.) The voltage induced in the core causes some small amounts of current flow, and these small currents are called eddy currents.

Transformers often use laminated iron for core material. Or they will used what appears to be powdered iron grains that are tightly compressed and stuck together. Both these tactics are designed to provide some insulation between pieces of material in the core, and this will considerably reduce eddy currents.

Need a link to the Wikipedia article on eddy currents? You got it.