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Networking bottlenecks are not always on your box - they could be on the router your box is talking to. Or, depending on load, the ethernet packets themselves could be crowding the physical subnet. Do you have a way to mock 500 users playing the game that would truly keep all the traffic internal to your OS? Because if that works, but the lag persists for real players, the problem is external to your OS.
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Good point. I actually don't know what performance looks like with 500 real users. The way I'm mocking right now is by running a script on my local machine that generates 500+ bots that listens to events to auto join + play games. I tried to implement the bots to behave as closely to humans as possible. I'm not sure if this is what you mean by keeping traffic internal to my box's OS, but right now this approach creates lag. I didn't consider whether spinning up hundreds of websocket connections from a single source (my local machine) would have any implications when load testing hm
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Networking often scales better horizontally.

Computation can sometimes scale well vertically but proprietary OS’s are more likely to be tuned for it…as a premium feature.

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