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Pretty sure he's referring to framerate lag, having lots of players on screen seems to cause that, don't see why it would cause network lag since there's no specific hosts for specific levels.
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No, he means server lag. I don't remember the exact reason, but when the Spring update was released there was a bug in a script that was warping all players to Graal City. This is what caused the server to lag so bad, because he said when there are a lot of players in one level it exponentially builds up lag or something like that.