There are, as I see it, a few different issues that all get lumped under the same title of "lag". "Lag", by definition, is to "fail to keep pace". Lag is "experienced" when the action fails to keep pace with a player's commands; when a player fails to keep pace with another player; and when game time fails to keep pace with realtime.
Lag on the server is an example of game time failing to keep up with real time. Players get used to being able to move this distance in this amount of real time, and because the server is so "lagged", they aren't. This usually happens when there is so much action happening on a specific server (for worlds that run multiple servers per world). In-game events, such as a city invasion by hundreds of MOBs, leads to a lot of AI churning away at the server, and an unusually high concentration of players in one spot, fending them off. Also, unsanctioned events can lead to more of a load on a server than developers might expect. The fault: aging hardware, unrealistic computing requirements, underestimation of popularity... mostly things in the developer's realm.
As MMOs get more and more complex, and more and more 3D, the video card is getting taxed to the limit. While this problem will never rear its head in a text-based MUD, graphics are becoming more and more involved, and the creation of them is being done on the client more and more. From environmental textures and effects, to world objects that rotate, flicker and swing, to the numerous MOBs and players that run by with their armor glinting in ten sources of light, the days of static graphics are going. Well, maybe not going, but are falling by the wayside. Here the fault can be prescribed 50/50: users might need to keep up with their state-of-the-art hardware, or developers might be expecting too much of their userbase.
The biggest culprit of them all -- the Internet. How many miles of cable and fibre do the bits of information between client and server go through? How many pieces of hardware (routers) have to shunt it this way and that? What quality is the medium, and how quick the messenger? This is the biggest bugbear, because it's out of the hands of everyone involved. Neither players nor developers can choose which path their packets should take. Sure, the player can move to a better ISP, or the company can sit on a thicker backbone, but no backbone will be perfect for everyone, and some places still have more hops than desired to get from A to B.
Until the internet is completely pervasive across the globe, and routing technology because near-instantaneous and universally-installed thusly, this will be a problem for the developers to worry about. You need to
- Make it impossible for two people to become out-of-sync
- Make it so players don't notice if they become out-of-sync
- Make it so it doesn't matter if they become out-of-sync
By "out-of-sync", I mean our second definition of lag above, where one layer fails to keep pace with another (and in this case, a player could include a MOB).
Make it impossible for two people to become out-of-sync
Force instructions from the player and events from the server to happen based on a "tick" from some clock which keeps track of time. The length of a tick would be the maximum latency of all the players connected to the game. Everyone is forced to play at the speed of the slowest player, in what basically becomes a turn-based game with a timer per turn. Everyone has X seconds to figure out what they're doing this "turn", with the slowest player having the least amount of time to act (because he or she spent most of their turn sending their last action and waiting for results). Doesn't make for much of a game...
Make it so players don't notice if they become out-of-sync
Support on-going commands ("walk north") that will take place on the server, even if the player isn't able to continually send the command. If the server receives a "stop" command a little too late (because it walked them a bit further), then "snap" them back the where they think they should be. This can lead to other players seeing the lagging player hop back a few steps or continue going in the same direction too much (which seems to be what you see in World of Warcraft); or, the player's client, which has been smoothly drawing the action that it's hoping and assuming is happening will suddenly "rubberband" the player back to reality - that is, the spot that he or she is really standing in (now that the client has gotten new information). This is what you see if Ultima Online.
Make it so it doesn't matter if they become out-of-sync
Design the game so it's less of a "twitch" game, where fast reflexes are required to play. Ultima Online PvP used to be all about who had the fastest connection (once the combatants all knew the "best" methods). With one expansion, it changed so that your items were more important than your strategy, thus allowing the server to decide the winner, even if one of the participants couldn't keep up as well as the other. It didn't remove the need for skill in combat, but it helped reduce the effects of differing connectivity between players.
PvM is a bit different. MOBs are designed with their AI as-is, so they don't have different tactics. To make monster X challenging to a 13 level wizard, it has these skills, these stats, these items. But challenging to what level of lag? You want the guy playing down the street with the 5ms latency to have to back off once or twice to heal himself, but does that make it too hard for the woman playing across the continent with the local ISP with bad copper lines underground? Do you make that same monster easier, so the lagged player can still back off in time, thus making it very easy for the low-lag player -- too easy, for the reward?
Or can combat be made even less "twitch" dependant, so a lagged player can decide early on that they're outmatched and thus escape, while there's no benefit to a character of the same strength with a good connection? Do we boil it down to
You have chosen to attack monster X. Do you wish to proceed?
You have died! / You have vanquished your foe!
where the same result is going to happen to any player, whether their internet connection tells them immediately or half a second later?
Combat, whether PvP, PvM or PvE (versus the environment, such as jumping onto the swaying bridge), is where most of the problems occur. Role-playing is still effective even if your dialog is half a second behind the others -- not everyone's a professional typist! Shopping in-game, wandering the lands, and interacting with NPCs are all things that can happen with leisure. Combat is where it's going to be most noticeable, because that's where the consequence of lag is going to be the most dire: character death, usually.
So the fault for this kind of lag? No fault. But, the developers are the ones that might be able to do something about it.
But that's only half of the problem with the lag between client and server. In addition to the delay between client and server for moving the information, there's also the volume of information.
In Ultima Online, player houses can have items locked down and viewable by passers-by. This means that as a player walks through an area, information about item type and location from many objects are being sent to that player's client. The more items on-screen, the more data being sent. The faster they're moving (or, in this case, trying to move), the more items are coming on screen, and thus even more data. Some houses would be so "decorated" that a noticeable delay would occur as information about hundreds of items was suddenly shoved towards the client. There was even a case years ago where you could make a "black hole" in the game, where if you got too close to a stack of items (a very, very numerous stack), your client would crash. Whether that was from an inability to cope with the number of items, or just too much network data, I don't know. Probably the former, but can you imagine the latter?
In an old text MUD, InFiNiTy CoMpLeX, you could, with the right weapon, take out 15-16 enemies in one shot (it was a rocket launcher). This, I suspect, caused nearly all the different kinds of lag: the server had to handle the firing of the weapon, the damage dealt to numerous MOBs, and their deaths (which included giving experience and broadcasting the event to everyone in the complex) - this was all on a single machine that was running the rest of the BBS on which the game was hosted; the amount of text that had to be send to every client added up to hundreds of bytes, which was significant at 2400 baud; and the sheer number of characters every player received upon this event took some time to display on their slow, 8086 DOS machine (if they were lucky).
Fault: Developers, I suppose: it's up to them to cut down on the size and number of packets being sent back and forth.
Of course, I supply no hard solutions to these problems yet -- I'm still learning. But it's a start, at least, that I know these problems are out there, and that I'm going to have to work around them, if not try to quash them completely.