First of all, there are profile photos and then avatars. If the avatar module is not installed, then Dolphin will use the first photo of the profile photo album as the avatar. When a member joins, one photo album is created automatically for them, and that album is used as the profile photo album. The first photo in the album is the one that gets used for the profile photo. A member can arrange photos in an album by just dragging the photo to a new position. There are settings for photos in the admin section for Dolphin.
Now if you decide to install the avatar module, then that is separate. In that case a member uploads and crops an image to use for the avatar. I have both on my site, members often wish to use a comic image, or such for their avatar and then have their profile photos separate.
For profile photos, the member simply goes to their photo album and clicks on upload. The image is uploaded to the site and stored as the original. Then a smaller size is created to use for the display page and a thumbnail is created for areas of the site that uses thumbnails.