OpenID is a decentralized single sign-on system that allows users to authenticate using an identity provider of their choice instead of individual credentials for each website. It works by allowing users to claim ownership of a URI that acts as their identifier, and authenticate to websites by proving control of that URI to the identity provider rather than sharing separate credentials with each site. Ownership of the URI and choice of identity provider remains with the user, avoiding issues like username squatting and lock-in to a single provider seen in other systems.