The thing you're missing is that the point of client-side simulation and lag compensation is simply one of UX. It makes the game playable.

> Cloud gaming substitutes reconciling these n+1 simulations with some input latency for each player.

You're just pitching the naive networking model that every developer starts with (because it's trivial) until they realize how horrendous it is to wait 100ms on every single input.

Also, it's not "some input latency", it's the full latency of the entire round trip. From input to server (40ms) and then video to client (40ms) just to see how an action you did 80ms ago panned out.

You've eliminated none of the trade-offs, just exchanged one frustration (dying even though you shot someone before they shot you) with another (watching a delayed video feed of them shooting you while you wait for your input to cross the network).

There's a reason why client simulation is ubiquitous. Btw, lag compensation is really hard and nobody would want to do it if they could get away with the naive networking model.