The server lag is probably a combination of several things that don't have to do with the hardware.
Ruxxter explained to me a while ago that the way Graal was coded is really inefficient in terms of handling multiple players in one level. I can't recall the exact explanation, but if there are 63 players in a level and and another player enters, making it 64, the data being transferred becomes exponentially larger. fp4 probably understands how that works, if it's true.
There's that, then the fact that AFK disconnection has been broken for a really long time now. Players that are inactive and AFK should be booted off the game entirely so that they aren't taking up any server resources. iClassic staff rigged a way to warp them all to an idle level, but I'm sure it isn't as efficient. Getting that to work all probably requires access to the game that only Stefan had.
Have to consider that Graal was coded as a game that never saw more than ~300 people on a single server in the PC days. I have to imagine the port to the iOS platform didn't include a rewrite of the game engine or anything like that, so 4000+ is definitely not what the game was built for. Why unixmad has not removed his head from his ass and done something about it yet is a mystery though.