Diff Algorithm?

An O(ND) Difference Algorithm and its Variations (1986, Eugene W. Myers) is a fantastic paper and you may want to start there. It includes pseudo-code and a nice visualization of the graph traversals involved in doing the diff.

Section 4 of the paper introduces some refinements to the algorithm that make it very effective.

Successfully implementing this will leave you with a very useful tool in your toolbox (and probably some excellent experience as well).

Generating the output format you need can sometimes be tricky, but if you have understanding of the algorithm internals, then you should be able to output anything you need. You can also introduce heuristics to affect the output and make certain tradeoffs.

Here is a page that includes a bit of documentation, full source code, and examples of a diff algorithm using the techniques in the aforementioned algorithm.

The source code appears to follow the basic algorithm closely and is easy to read.

There's also a bit on preparing the input, which you may find useful. There's a huge difference in output when you are diffing by character or token (word).

Good luck!

See https://github.com/google/diff-match-patch

"The Diff Match and Patch libraries offer robust algorithms to perform the operations required for synchronizing plain text. ... Currently available in Java, JavaScript, C++, C# and Python"

Also see the wikipedia.org Diff page and - "Bram Cohen: The diff problem has been solved"

I would begin by looking at the actual source code for diff, which GNU makes available.

For an understanding of how that source code actually works, the docs in that package reference the papers that inspired it:

The basic algorithm is described in "An O(ND) Difference Algorithm and its Variations", Eugene W. Myers, 'Algorithmica' Vol. 1 No. 2, 1986, pp. 251-266; and in "A File Comparison Program", Webb Miller and Eugene W. Myers, 'Software--Practice and Experience' Vol. 15 No. 11, 1985, pp. 1025-1040. The algorithm was independently discovered as described in "Algorithms for Approximate String Matching", E. Ukkonen, `Information and Control' Vol. 64, 1985, pp. 100-118.

Reading the papers then looking at the source code for an implementation should be more than enough to understand how it works.