JPEG is a lossy image compression algorithm, not a file format. It uses a 4-step process to compress images: 1) transforming RGB to YCbCr color space, 2) applying a discrete cosine transformation to identify redundant data, 3) quantizing the remaining data, and 4) encoding the result to minimize storage requirements. Typical compression ratios are 10:1 to 20:1 without visible loss and up to 100:1 compression for low quality applications.