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I don't think you have a choice as to whether you want to play on a dedicated server or not.
That's up to the publisher, developer or whoever is in charge of setting up the online setup, service whether the server will be dedicated or not.
Anyways, to answer your question, a dedicated server is like, a type of hosting account, Internet hosting where the client/owner leases or even owns an entire server that is not shared with anyone.
That means the resources of that server aren't shared with someone else. And how could this be tied to XBL?
I'd say a dedicated XBL server is where the game is not hosted by a 'host,' so say, Gears of War. That online setup is not on a dedicated server, considering the fact that a host's/player's resources, internet connection (including speed, etc) is used for the game. If his connection sucks, chances are the game is going to lag, etc.
As for a dedicated server, I'd say Halo 3 would be a good example, or at least Halo 2. I'm not familiar with Halo 3, I've never played.
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Everybody call me A-Will, yo sup! 
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