The extracellular domain of several membrane-anchored proteins is released from the cell surface as soluble proteins through a regulated proteolytic mechanism called ectodomain shedding. Cells use ectodomain shedding to actively regulate the expression and function of surface molecules, and modulate a wide variety of cellular and physiological processes. Ectodomain shedding rapidly converts membrane-associated proteins into soluble effectors and, at the same time, rapidly reduces the level of cell surface expression. For some proteins, ectodomain shedding is also a prerequisite for intramembrane proteolysis, which liberates the cytoplasmic domain of the affected molecule and associated signaling factors to regulate transcription. Ectodomain shedding is a process that is highly regulated by specific agonists, antagonists, and intracellular signaling pathways. Moreover, only about 2% of cell surface proteins are released from the surface by ectodomain shedding, indicating that cells selectively shed their protein ectodomains. This review will describe the molecular and cellular mechanisms of ectodomain shedding, and discuss its major functions in lung development and disease.