There are actually two methods for making instant coffee. In the first, liquid coffee is sprayed in a fine mist through very hot, very dry air. By the time the coffee droplets land, they have dried into a powder.
The second method is freeze-drying, where the liquid is forced from the frozen coffee through chemical sublimation. Reaching back for our 8th grade science lessons, this process forces the ice to vaporize without going through the liquid stage. In the case of instant coffee, this leaves behind a shelf-stable coffee powder that can then be reconstituted in water.
Both methods have an adverse affect on the flavor and caffeine-content in the reconstituted coffee, though freeze-drying leaves more of the aroma compounds intact. In some cases, the coffee powder is then supplemented with additional flavor and aroma compounds to better simulated fresh coffee.
Even if you don't drink instant coffee, it's a handy product to keep around the kitchen. Because it's so concentrated, instant coffee is often much more effective at infusing a recipe with coffee-flavor than fresh liquid coffee. Using fresh coffee can also throw off the ratio of liquids.
How do you use instant coffee in your baking and cooking?
Related: Coffee Methods: The French Press