What is the recommended way for testing the app during development?

Right now I just straight up edit the files in:

/c/Users/{my_user}/AppData/Local/Overwolf/Extensions/ghipasdsadsdadgvbdag/1.0.1/

The recommended way is to load your app unpacked Directly from your code directory on disk:

also, in the manifest, use the developer flag so that you get an auto-reload on each update.
It is not a good idea to work on the %localappdata% directory - because it might get deleted when uninstalling overwolf.