Taken from Development Seed's article:
"At its simplest, a feature server is a website where someone can get features and get updates for those features. It could be a private repository for a network of Drupal sites within an organization, or it could be a public facing site from which anyone can download and add features to their own Drupal website."
Feature Servers are distributed in that you may run your own Feature Server and share your features with others autonomously. A Feature server does not need to be a 'central' hub where everyone goes to upload their features. However, this site acts as one if you so wish to use it.
Feature Servers implement the UpdateXML logic per the Update module in Drupal, allowing users of features to be notified of updates when you make a new release for your Feature.
Read more about Feature Servers.