It doesn't defeat the purpose of streaming. You don't have to emulate everything in the game, just everything in your vicinity that can possibly affect what you see and hear.
The purpose of streaming is to remove the need for the simulation and rendering at all. The client is a dumb terminal that just renders frames and records input.
The moment you start making the client smart again — making it aware of a subset of the world state, making it do its own rendering based on the input — you've just reinvented current client-server gaming.
You still get to run a physics model and game logic though and that is a non-neglible part of modern games.