So you really beleive there's a method to offload a portion of the rendering to the cloud without either cutting your framerate or displaying incomplete frames half the time?
As for that demo, you mean the questionable one from a few weeks or so ago? Yea, i seen it. Doesn't mean i believe it's completely legit though. Mainly because even with something else calculating the physics, the increase of things being rendered, on the client(hint, that's your xbox), from the enhanced physics will not come for free like they want you to believe. In fact, i'm pretty sure that's why they locked the framerate in that demo, to hide the fact it still wouldn't be 'free'.
I don't believe, I know. There's a fundamental difference.
Having 3x the CPU power assigned to each X1 (According to MS) means that heavy CPU tasks could be offloaded into the cloud (Physics, Particle Effects, AI etc). With these heavy CPU tasks out of the way, the engine has way more time to work with in a frame. This could be assigned to the GPU for prettier surroundings or give to the CPU to work on things locally more. Although, like the BUILD demo shows, you could simply off-load tasks like destruction physics for better gameplay while keeping the frame-rate stable. It's quite a technical idea, but a very simple one which has been used in scientific and mathematical studies for years. You just have to keep in mind which tasks can be off-loaded which aren't effected by latency. You're not going to move collision detection to the cloud are you?
The problem isn't with rendering the squares, draw-calls became hardly an issue when the 360 was released. It's the calculations of how the chunks react and move in the environment which takes the time in an engine.