It's a computer that is always online to accept multiple users and run multiplayer sessions for those users for a specific game.
it has a higher bandwidth than Peer to peer so your ping will mostly be lower. the server is mostly more powerful than a normal pc and doesn't play the game it self it just links the gamers together so its like the host in Peer to peer but it is only bussy whit the players and not whit rendering. thus it is better than peer to peer
"dedicated server" in terms of certain game's aspects, is often meant as an feature of the application to run the multiplayer component independently without any kind of graphical rendering, thus "dedicated" to only running the core of the engine and multiplayer component, so it's mostly a program software that can be launched on any PC, wether it is a normal desktop computer or a workstation or server-grade computer does not really matter since it's all windows, but for linux, the game developer needs to release linux bins of the "dedicated server" - the actual executable files that linux can use , since .exe is a windows program only.
Because there is no graphical stuff, you can't play the game while running a dedicated server, but some software such as from ID Software has ability to run multiple instances of the same program, so you technically can play the game on the same computer (ex. call of duty 2 command line "allowdupe")
Dedicated servers are so much better just because clans and advanced users have ability to customize advanced settings, conosole commands (developer mode) and the DS ofen eases the use of mods and other tweaks, the most biggest point of all is the dedicated internet availability, as it is mostly used by advanced users, they know they shouldn't be running anything else that takes too much bandwidth (experience in balancing network load to programs) - plus, dedicated servers are mostly run on high-end hardware so there is minimal lag that
However, dedicated server requires experties, and if it's not set up or configured correctly, most probably by an inexperienced user, it can perform as bad as P2P or even worse depending on computer specfifications and internet speed / quality.
Internet quality is an external factor (ex disconnects, temporary freeze) that can lower the experience and performance of dedicated server, this is mostly caused by bad ISPs, these are mostly USA ISPs which are one of the crappiest in the world. (the whole infrastructure is meh) .. but this can happen to any ISP due to technical problems, just that it can happen so much more in usa than in europe. I have raised this question because quality is more important than speed, you can have 20/20 and run a server for 64 people, but if it disconnecting every minute ? ... ;)
Matchmaking systems often employ P2P protocol which is normally a very badly optimized feature, very badly designed because everything is automated and it does not perform good in practise, any unexperienced user can become a "host" (it's not usually called server in P2P but rather a host) a host can be anyone's crappy computer with bad internet, bad computer and config settings, anyone from anywhere over the world.
P2P Matchmaking systems which are astronomically inferior to dedicated servers often do not have support for mods, tweaks, developer modes, developer console ...etc ; speaking generally ; but some companies have their own proprietary systems for example like Blizzard's ("new") BattleNet 0.2 ... which in reality is nothing ("0.3.4" currently :p) compared to what they were promising prior SC2 release. Consider the fact that RTS games never had full fledged dedicated servers since it's not such a latency dependand gameplay.
Because of P2P , the slow net issues , some games have region restrictions to block long-range communication just because of latency problems.
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