When people talk about software decentralization, there are actually three separate axes of centralization/decentralization that they may be talking about.

Architectural (de)centralization — how many physical computers is a system made up of? How many of those computers can it tolerate breaking down at any single time?

Political (de)centralization — how many individuals or organizations ultimately control the computers that the system is made up of?

Logical (de)centralization— does the interface and data structures that the system presents and maintains look more like a single monolithic object, or an amorphous swarm?

Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer)

Three reasons for Decentralization

Fault tolerance— decentralized systems are less likely to fail accidentally because they rely on many separate components that are not likely.

Attack resistance— decentralized systems are more expensive to attack and destroy or manipulate because they lack sensitive central points that can be attacked at much lower cost than the economic size of the surrounding system.

Collusion resistance — it is much harder for participants in decentralized systems to collude to act in ways that benefit them at the expense of other participants

once you start thinking about fault tolerance of the community that governs the protocol’s ongoing development, then political decentralization is important too.

once you adopt a richer economic model, and particularly one that admits the possibility of coercion (or much milder things like targeted DoS attacks against nodes), decentralization becomes more important.

In general, the modern world is in many cases characterized by an attack/defense asymmetry in favor of the attacker

the attacker’s leverage is often sublinear

it pushes strongly in favor of proof of stake over proof of work, as computer hardware is easy to detect, regulate, or attack, whereas coins can be much more easily hidden

Collusion is difficult to define; perhaps the only truly valid way to put it is to simply say that collusion is “coordination that we don’t like”.

one sub-group being able to coordinate while the others cannot is dangerous.

If any one actor gets more than 1/3 of the mining power in a proof of work system, they can gain outsized profits by selfish-mining.

Perhaps the best solution may be to rely heavily on the one group that is guaranteed to be fairly decentralized: the protocol’s users.