App-specific passwords are a feature of two-step verification that allow you to sign in to iCloud securely when you use third party apps.

To use iCloud with any third party apps (such as Microsoft Outlook, Mozilla Thunderbird, or BusyCal) you must sign in using an app-specific password. App-specific passwords allow you to sign in securely, even if the app you're using doesn't support two-step verification. Using an app-specific password also ensures that your primary Apple ID password isn't collected or stored by any third party apps you might use.

Find out how to set up your own App-specific passwords here.