Lossless compression is a method of reducing the size of a file without losing any information. This means that when the file is decompressed, it returns to its original state, preserving all the data exactly as it was. Common formats that use lossless compression include ZIP for documents and PNG for images. This technique is particularly useful for text files, software, and certain types of images where quality is crucial. Unlike lossy compression, which sacrifices some data to achieve smaller file sizes, lossless compression ensures that every bit of information remains intact, making it ideal for archiving and data storage.