The way Matrix is doing it blurs the line between "federated" and "distributed" into a continuum which is really the best of both worlds imo. The existing concept of federation as a bunch of dedicated servers constantly synchronizing with each other 24/7 will continue to work just fine. But now each individual client device will be a full federated node itself, though perhaps a bit more flaky than a normal node might be; but this isn't a problem because the matrix protocol was designed from the ground up to be robust to such issues.
Based on your diagram, the system can seamlessly blend between (B) and (C) based on the needs of users. Eventually the default would become (C) while being backwards compatible with existing systems, but it might blend down to (B) if a user sets up a homeserver for friends and family, or an organization may want to have a homeserver for continuity or legal reasons etc.