*snip*what you are describing is just prediction by the local client as to what might happen, but to maintain a consistent universe there must still be one arbiter, the server ... Most likely one instance of thenetworked games.
Yes correct, but as far as input-to-screen latency is concerned, it is all local and as such it has little to do with network latency. What is important is the perceived responsiveness of the game. For instance, in Gears Of War (not sure if all versions did it), it is usually very hard to tell whether there is network latency or not. The only times you can really tell is when you do something and the outcome is completely unexpected or if your position jumps around (you enter a building but a second or two later you are outside again).
Not sure who here is old enough to remember but in the original Doom games for instance, the way it worked was that any input had to go through the server round trip, meaning that when you rotated it would usually lag half a sec or so, even on a good day. This caused a lot of people to get motion sickness. This was until they changed it to do movement locally.