How do you develop characters?

A mix of both

I let them develop themselves. Take Twera for example. In the first chapter of Hope in the Strangest Places, she comes off as a rude (*ahem*) tailhole. Later in the story, it will be revealed that it's all an act. She was actually scared and lonely, putting on a Valente front for the much larger dragons.
Characters like Twera just seem to take control of their own stories.

Of course, I never reveal too much backstory right off the bat. Takes all the fun out of the book. *wink wink*