this post was submitted on 20 Jun 2023
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Tags are essential in the Fediverse because there's no algorithm here. No "suggested" follow or posts. Post ( I'm talking about microblogging mostly) appear in chronological order solely. So if you want to search for toots/posts/microblogs of an specific topic, or connect with people that share a similar interest with you (outside of communities/magazines/groups), tags are the only option.
You're confusing something. Hashtags matter because there is neither a global nor an instance-level full-text search on many platforms (especially Mastodon), only one for your own "storage" (timeline, favs, bookmarks, boosts). Lemmy and kbin have an instance-level full-text search, though.
As long as one person follows the author or discovered a post, it becomes visible via its hashtags to everyone on the same server. That's why you receive a warning if you write an unlisted post with hashtags, since they wouldn't work.
What you refer to as algorithm would be applied afterwards. It would collect, sort, filter, or transform those discovered posts according to settings or a generated profile (another algorithm).