XZ compression is a data compression method that uses the LZMA (Lempel-Ziv-Markov chain algorithm) to reduce file sizes. It is known for achieving high compression ratios, making it effective for compressing large files, such as software packages and archives. The XZ format is widely used in various applications, including Linux distributions, where it helps save storage space and speeds up file transfers. It supports both lossless compression and multi-threading, allowing for faster processing on modern multi-core processors.