diff --git a/compression/lz78.py b/compression/lz78.py
new file mode 100644
index 000000000000..b4987488f81e
--- /dev/null
+++ b/compression/lz78.py
@@ -0,0 +1,133 @@
+"""
+Sources:
+https://en.wikipedia.org/wiki/LZ77_and_LZ78#LZ78
+"""
+
+from dataclasses import dataclass
+
+__version__ = "1.0"
+__author__ = "Ahmed Tamer"
+
+
+@dataclass
+class Token:
+    """
+    Dataclass representing pair called token consisting of the dictionary index
+    and a single character that follows the phrase in the dictionary.
+    """
+
+    index: int
+    char: str
+
+    def __repr__(self) -> str:
+        """
+        >>> token = Token(1, "c")
+        >>> repr(token)
+        '(1, c)'
+        >>> str(token)
+        '(1, c)'
+        """
+        return f"({self.index}, {self.char})"
+
+
+class LZ78Compressor:
+    """
+    Class containing compress and decompress methods using LZ78 compression algorithm.
+    """
+
+    def compress(self, text: str) -> list[Token]:
+        """
+        Compress the given string text using LZ78 compression algorithm.
+
+        Args:
+          text: string to be compressed
+
+        Returns:
+          output: the compressed text as a list of Tokens
+
+        Tests:
+          >>> lz78_compressor = LZ78Compressor()
+          >>> str(lz78_compressor.compress("ababcbababaa"))
+          '[(0, a), (0, b), (1, b), (0, c), (2, a), (5, b), (1, a)]'
+          >>> str(lz78_compressor.compress("aacaacabcabaaac"))
+          '[(0, a), (1, c), (1, a), (0, c), (1, b), (4, a), (0, b), (3, a)]'
+          >>> str(lz78_compressor.compress(""))
+          '[]'
+          >>> lz78_compressor.compress([])
+          Traceback (most recent call last):
+          TypeError: Expected string.
+          >>> lz78_compressor.compress({})
+          Traceback (most recent call last):
+          TypeError: Expected string.
+          >>> all(len(s) >= len(lz78_compressor.compress(s)) for s in (
+          ...     "", "AA", "AB", "AAA", "ABC", "ABCDEFGH"))
+          True
+        """
+
+        if not isinstance(text, str):
+            raise TypeError("Expected string.")
+
+        phrase_dict = {}
+        tokens = []
+        code = 1
+        phrase = ""
+        for char in text:
+            phrase += char
+            if phrase not in phrase_dict:
+                phrase_dict[phrase] = str(code)
+                if len(phrase) == 1:
+                    tokens.append(Token(0, phrase))
+                else:
+                    tokens.append(Token(int(phrase_dict[phrase[:-1]]), phrase[-1]))
+                code += 1
+                phrase = ""
+        return tokens
+
+    def decompress(self, tokens: list[Token]) -> str:
+        """
+        Convert the list of tokens into an output string.
+
+        Args:
+          tokens: list containing pairs (index, char)
+
+        Returns:
+          output: decompressed text
+
+        Tests:
+          >>> lz78_compressor = LZ78Compressor()
+          >>> lz78_compressor.decompress([Token(0, 'c'), Token(0, 'a'), Token(0, 'b'),
+          ... Token(0, 'r'), Token(2, 'c'), Token(2, 'd'), Token(2, 'b'), Token(4, 'a'),
+          ... Token(4, 'r'), Token(2, 'r'), Token(8, 'd')])
+          'cabracadabrarrarrad'
+          >>> lz78_compressor.decompress([Token(0, 'a'), Token(0, 'b'), Token(1, 'b'),
+          ... Token(0, 'c'), Token(2, 'a'), Token(5, 'b'), Token(1, 'a')])
+          'ababcbababaa'
+          >>> lz78_compressor.decompress([Token(0, 'a'), Token(1, 'c'), Token(1, 'a'),
+          ... Token(0, 'c'), Token(1, 'b'), Token(4, 'a'),
+          ... Token(0, 'b'), Token(3, 'a')])
+          'aacaacabcabaaa'
+        """
+
+        text = ""
+        phrase_dict = {"0": ""}
+        code = 1
+        for token in tokens:
+            phrase = phrase_dict[str(token.index)] + token.char
+            phrase_dict[str(code)] = phrase
+            code += 1
+            text += phrase
+        return text
+
+
+if __name__ == "__main__":
+    from doctest import testmod
+
+    testmod()
+
+    lz78_compressor = LZ78Compressor()
+
+    # Example
+    text = "aacaacabcabaaa"
+    tokens = lz78_compressor.compress(text)
+    decompressed_text = lz78_compressor.decompress(tokens)
+    assert decompressed_text == text, "Invalid result."