This is a huge topic and one of the main reasons why we're not promising much yet in terms of online play. Compared to the simple combat mechanics of MMOs the physics based combat in SG requires a massive amount of processing power. Also the complex physics require the lowest possible latency. These two things alone make a true client/server model impossible.
There are many ways people could potentially cheat and each one requires a solution. Our basic idea is that we would offer persistent characters on our servers but players would need to participate in peer to peer games with reciprocal mediation and perhaps a small amount from the servers. We would probably also introduce severe penalties for people found cheating (this will not be free to play). Similarly we imagined competitive arena combats between players where spectating players also act as mediators.
To clarify by "not free to play" I mean you must purchase a copy of the game. We might introduce a very reasonable subscription fee (for these services alone) if we need to cover costs. Either way this is, for the time being, intended as a single player / LAN game.
I think, if you haven't completely been turned off, the mechanics are certainly possible (although challenging). Please have a look at Darkfall online. This is a massively multilayer RPG capable of having 200 vs 200 fights in full FPS fashion with unnoticeable lag, if they're able to do it I think it'd certainly be possible on SG. I would have thought this step would be preferred by Bare Mettle as this engine is your baby, I'm sure you'd want it to last ten or even fifteen years as an MMO rather than having a 2-3 month lifespan after release. There are many benefits:
- Constant monthly income from subscriptions
- A huge cult following created, which isn't possible with single player RPGs
- Cheat prevention, with everything being stored on your servers it makes it infinitely easier to monitor and protect
- Better gameplay, clans, territory, insane and epic battles (Can you imagine how good even a 10 vs 10 battle with this engine would be?)
- The ability to constantly progress and update the game and engine due to monthly payments. Not a quick single purchase and then the game dies out.
Hell, you could release the single player game, and then create the MMO version as an extension (which slowly becomes the primary feature).
Otherwise, if I still haven't convinced you... Saving the character data on your servers would be a huge amount better than allowing people to modify characters and use cheats clientside. Hell, I run an online game with 25,000 daily players all stored server side and this data is changed and stored live, updated and selected thousands of times per second. A quick select / update at the start / end of a session would be very simple, quick, and use up less than a GB of space for 1 million players depending on how much data you store for them. The only downside is the inability to play the game if the servers are down (or if the user isn't connected to the internet, but let's be honest this wouldn't be a problem). The huge, massive advantage is that you can confirm that the user owns the game before allowing them to play, completely eliminating piracy if it's done right.
This is what really frustrated me with borderlands ... I spend weeks levelling up, and then someone joins my game who simply cheated to the the highest level and duped weapons with 9999 damage. If it's possible for anyone to cheat or advance in any way other than normal, even if it isn't multiplayer - this completely ruins the experience for me personally. Simply knowing that others are using cheats to advance themselves spoils it.
I hope this helps.