IMO we are only scratching the surface of cloud gaming so far. Right now it’s pretty much exclusively lift-and-shift, hosted versions of the same game, in many cases running on consumer GPUs. Cloud gaming allows for the development of cloud-native games that are so resource intensive (potentially architected so that more game state is shared across users) that they would not possible to implement on consumer hardware. They could also use new types of GPUs that are designed for more multi tenant use cases. We could even see ASICS developed for individual games!
I think the biggest challenge is that designing these new types of games is going to be extremely hard. Very few people are actually able to design performance intensive applications from the ground up outside of well-scoped paradigms (at least web servers, databases, and desktop games have a lot of prior art and existing tools). Cloud native games have almost no prior art and almost limitless possibilities for how they could be designed and implemented, including as I mentioned even novel hardware.
I've thought about this off and on, and there's certainly interesting possibilities. You can imagine a cloud renderer that does something like a global scatter / photon mapping pass, while each client's session on the front end tier does an independent gather/render. Obviously there's huge problems to making something like this work practically, but just mention it as an example of the sort of more novel directions we should at least consider.
If the "metaverse" ever gets anywhere beyond Make Money Fast and reaches AAA title quality, running the client in "the cloud" may be useful. Mostly because the clients can have more bandwidth to the asset servers. You need more bandwidth to render locally than to render remotely.
The downside is that VR won't work with that much network latency.
I think the biggest challenge is that designing these new types of games is going to be extremely hard. Very few people are actually able to design performance intensive applications from the ground up outside of well-scoped paradigms (at least web servers, databases, and desktop games have a lot of prior art and existing tools). Cloud native games have almost no prior art and almost limitless possibilities for how they could be designed and implemented, including as I mentioned even novel hardware.