I've been reading a few questions on this site, and I've seen the terms First, Second or Third Drafts. What does this refer to actually? And could someone give a clear detail of what they are, and why specifically three drafts?
A "draft" is one complete pass-through of writing a piece (an article, blog post, short story, novella, novel, etc.).
Your "first draft" is generally considered the first time you commit the entire thing to paper (or pixels), from beginning to end.
After that, you can measure subsequent drafts or rounds however you like. It's reasonable to divide them as "one round of writing plus one round of editing equals one draft," but there's no ironclad rule. (I'm defining "a round" as going through from beginning to end until you're satisfied with the corrections you want to make, and you're ready either to hand it to someone else to see or to start from the beginning again.)
The first draft of almost anything is usually lousy because you're focused on building and iterating your ideas. Subsequent rounds (particularly with feedback of others) allow you to develop characters, polish your turns of phrase, fix plot holes, and cut out unnecessary scenes.
There's nothing magical about three drafts, or any other number of drafts. The writers who churn out several books a year I'm sure go through only a few drafts, while Mercedes Lackey famously rewrote her first trilogy seventeen times before the three books published.
Dittos to Lauren Ipsum. I'd add: Don't get hung up over how many drafts to write, or whether a given set of changes is sufficient to call this a new draft. I can't imagine any value in agonizing over whether you are presently on your 4th draft or your 5th. There's no rule that says you have to make revisions all over the document with every pass. It's perfectly legitimate to make 20 drafts of chapter 4 while not worrying about chapters 3 or 5 yet. Just keep working on the document until you're happy with it.