A decoupling capacitor is a capacitor used to decouple one part of an electrical network (circuit) from another. Noise caused by other circuit elements is shunted through the capacitor, reducing the effect it has on the rest of the circuit. An alternative name is bypass capacitor as it is used to bypass the power supply or other high impedance component of a circuit.
For example, if the voltage level for a device is fixed, changing power demands are manifested as changing current demand. The power supply must accommodate these variations in current draw with as little change as possible in the power supply voltage. When the current draw in a device changes, the power supply cannot respond to that change instantaneously. As a consequence, the voltage at the device changes for a brief period before the power supply responds. The voltage regulator adjusts the amount of current it is supplying to keep the output voltage constant but can only effectively maintain the output voltage for events at frequencies from DC to a few hundred kHz, depending on the regulator (some are effective at regulating in the low MHz). For transient events that occur at frequencies above this range, there is a time lag before the voltage regulator responds to the new current demand level. This is where the decoupling capacitor comes in. The decoupling capacitor works as the device’s local energy storage. The capacitor is placed between power line and ground to the circuit that current is to be provided. According to capacitor equation, i(t) = CdV(t)/dt, voltage drop between power line and ground results in current draw out from the capacitor to the circuit and when capacitance C is large enough, sufficient current is supplied with acceptable range of voltage drop (however, as described below, parasitic inductance is typically high for large capacitor so small and large capacitors are usually placed together in parallel to fully cover circuit bandwidth). The capacitor cannot provide DC power because it stores only a small amount of energy but this energy can respond very quickly to changing current demands. The capacitors effectively maintain power-supply voltage at frequencies roughly from hundreds of kHz to hundreds of MHz (in the milliseconds to nanoseconds range). Decoupling capacitors are not useful for events occurring above or below this range: at the low end, they don't store enough energy and at the high end (at or above the self-resonant frequency) their parasitic inductance dominates their (high) impedance.