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Quick Definition

Lag refers to any unintended slowdown in a game or any sudden latency in an internet signal, both of which can ruin a game for the players.

In fact, it's quite likely that lag is more universally hated than anything else in gaming.

More Details

Lag can be caused by various things. The most common reason is that the computer isn't able to handle everything the game is throwing at it. There is a finite number of instructions that a computer can handle in a given amount of time, and when these pile up the computer chokes. Complicated graphics take a lot of effort to produce, and the best way to deal with them is to have a dedicated graphics card in your machine. If your computer uses an integrated card, then the poor machine is going to need to handle both the graphics and the game's engine, a task that can easily overwhelm lower end machines.

Note that some software is just poorly designed, and that no matter what hardware you throw at it you'll never get it to perform decently. Some types of serious bugs can result in lag, for example.

Symptoms of lag can include any of the following:

Low frame rate
Games need around 30 frames per second in order to be playable. This allows the player to have enough time between screen updates to react to changes in the game's environment. However, if the computer is overburdened by the effort of running the game, its frames per second will drop sharply, causing the player's input to go out of sync with the action on screen. In some situations, the lags so badly that its frames per second is never high enough to make the game playable.

Lack of responsiveness (ie, freezing)
When games experience lag, they can end up losing track of the player's input. Clicking on things causes nothing to happen, nor does pressing a key produce any response. If the problem clears up, all of the commands entered while the program was lagging may either be executed in one big burst or they may just be completely ignored as if they were never entered. On the other hand, if the problem doesn't clear up quickly, the program may simply crash.

Rubber banding
Rubber-banding is a unique and sometimes bizarre thing to experience. This can only happen when the lag being experienced is a disruption of the connection between a server and client. Effectively, the client is talking to the server and continuing the game like everything's fine, but the server can't hear the client anymore due to the problem with the internet signal. When they reconnect, the server tells the client where everything is supposed to be, and the client dutifully moves everything where the server believed it was. This causes the objects in the game to suddenly jump to a new location, like a rubber band had "snapped" them back into place.

Ejection from the game
In extreme cases, the game may disconnect a player if the server can't hear the client talking to it anymore. Thus, the player is ejected from the game and needs to reconnect to play further. In cases like this, it's very likely that the player will have lost any progress they have made during that game session.