The MD5 algorithm is a cryptographic hash function that generates a 128-bit digest from a message of any length. It works by first padding the message to a length that is a multiple of 512 bits, then appending the message length. It initializes buffers and processes the message in 512-bit blocks using four rounds of 16 operations each, applying different functions to update the buffers. The final buffer values become the MD5 digest. It is commonly used to verify file integrity but is now considered insecure due to possible hash collisions.