LZW, or Lempel-Ziv-Welch, is a lossless data compression algorithm that reduces the size of files without losing any information. It works by replacing repeated sequences of data with shorter codes, allowing for efficient storage and transmission. This method is widely used in formats like GIF and TIFF. The algorithm builds a dictionary of sequences as it processes the data. When it encounters a sequence that has already been added to the dictionary, it replaces it with a reference to that entry. This approach makes LZW effective for compressing text and images, maintaining quality while saving space.