Short answer: no. Dedicated servers [b]do not[/b] reduce lag. Lag is a [u]user perceived[/u] phenomenon that occurs because of an inconsistency in the game, which is usually brought about because of a high latency (the amount of time it takes for a signal to be transmitted from source to destination). [b]A non-exhaustive list of some of the main advantages of dedicated servers over peer-to-peer might include[/b]: - Reliability: a server program residing on a high quality machine managed by a company (ie. Gaikai, Azure, Akamai, etc...) is far less likely to fail than someone hosting a match on a game console with a residential Internet connection. - Less cheating: the server program running is in control of the match much like the host is in a peer-to-peer equivalent. That means it gets to make the final decision about what is happening in the game world rather than say, a nefarious player with some modifications. Also, all player connections are directly to the server itself, which is separate from each player's machine, meaning player IP addresses are hidden (this very likely excludes chat systems, though). The only socket information (IP address/Port number) a player is going to see is his/her own and the server's. - Network connectivity: although this probably belongs in the reliability section above, it deserves its own section. The companies I've listed above have [i]extremely[/i] high bandwidth allocation and are not far from being connected into one of the major Internet backbones around the world. Compare this to an average player's residential/consumer connection from an ISP which is... not. [b]Some disadvantages of dedicated servers[/b]: - Fixed locations: probably the biggest issue with dedicated servers is that lag is still going to be an issue when a player lives a great distance away from a server, as the latency is going to increase as the distance does. For trans-continental players connecting to a server, this is probably going to be in the triple-digits and isn't going to be fun, especially in racing games. - Scalability: one of the main advantages of peer-to-peer hosting is that the games can be created and destroyed on-demand. For instance, if you wanted to play Campaign in Halo 3 with a friend, you just needed to fire up the game and away you go. One player hosts the game while the others connect to him/her. On the other hand, dedicated servers will place restrictions on the number of matches that can be hosted at any one time, which is why in some you'll end up needing to join a queue and wait for a free spot when someone drops out. How much this has changed in recent years with platforms which "expand" like Azure and EC2, I'm not sure.