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I think we're partly thinking of different games, probably reflecting different personal preferences. But hey, it's your dreamm mmorpg, not mine.

I will admit to ignorance concerning DaoC, except for a brief fling with the current trial version which disappeared rather quickly from my hard disk. I am rather curious about the scale of battles in that game? 100 combatants? 200? Because that is the scale I think is about the maximum that could be achieved with a relatively mature and disciplined group of players.

Am I also correct that this is the scale of combat you are envisioning? Because what I personally want to see is a combat system that could accomodate various levels of combat, from the skirmish level (handful of fighting player characters on each side) all the way to the epic battle scale (tens of thousands of NPC troops, dozens or even hundreds of player commanders/heroes/specialists).
And yes, the lag problem. I am thinking here of the long term, oh, a decade...or two...
something that requires a long evolution in terms of technology and game systems, and the combination of various systems that now exist in separate games.
As far as I am concerned, the mmorpg has come of age when I can be Conan, rising from a lowly adventurer to the King of Aquilonia...

I suppose you are thinking with your dream mmorpg more of something that might be feasible with current technology? Certainly, that line of evolution that starts from the current state of the fantasy mmorpg would benefit from a long, thorough look at their core element, which currently ranges from the individual through skirmish to squad-level (or at the very most company-level) combat.

But now the following: would a combat system that allows more structured combat for, say, groups of 100-odd players each not lead to a raid-like structure? By that, I mean that the individual player is no longer able to "shine" (either as an individual fighter or as a commander), but becomes a cog in the apparatus of the group? Organised fighting usually leaves only a limited amount of personal freedom and initiative to the individual fighter.