And that is indeed a million dollar question! Lag is pervasive in SL, and there is no such thing as a “lag free SIM” - except one that is completely empty.
Before this can be answered, it is first vital to understand what lag is exactly, so please refer to this page for an explanation of the 3 forms of lag.
If you find yourself being badly lagged, there are things you can do to reduce the effects of two of the three types: client and network. You can only reduce server side lag if you own or rent the parcel or region being affected by it.
This is the most common of lag you will experience in SL. And you can do a great deal about it, without requiring that others do anything, and all of it simply entails reducing your graphics settings. Try these one at a time; sometimes just one or two will be enough to make things significantly better. Also, they are not given in order: in different situations, some will be preferable solutions than others.
Ensure that anisotropic filtering and anti-aliasing are both disabled: Preferences → Graphics → Hardware Settings tab.
Reduce your draw distance.
Reduce the maximum number of non-impostor avatars (this makes drawing of distant avatars much faster): Preferences → Graphics → General.
Disable atmospheric shaders (which serves to drastically reduce how much your computer has to render, as the sky alone is very graphics-intensive).
If need be, inhibit the rendering of other avatars: Advanced → Rendering Types → Avatar.
Alternately, you can derender avatars one by one, by right clicking on them and selecting Derender.
You can also derender objects, the same way.
If there are many particle effects around you, turn particles off: Advanced → Rendering Types → Hide Particles.
If you have a dual graphic card laptop then see
here.
Make sure your anti-virus software is not scanning the viewer cache folders; this has been known to have a
huge impact on viewer performance. BitDefender is apparently one that is particularly bad in this respect.
Whitelist the viewer and the cache folder to prevent this from happening. Webroot is known to cause serious problems; see this special
Webroot page.
These things will reduce the “quality” of your SL experience, but they may be required if you find that your movement is badly impaired by client side lag.
If you own or rent a home, or a public venue, there are things you can do to reduce client lag for yourself and others without overly sacrificing the “feel” of the location. For example:
Use small textures on all structures, 512×512 or smaller.
Avoid using prims that change textures if possible; if you need them, again, try to keep the textures small.
Avoid using textures with alpha channels if none are needed (a solid brick wall texture doesn't need an alpha channel).
Make enclosed spaces that do not give too large a view of the exterior, especially the sky.
Use particles and animated textures sparingly.
Another common cause of lag is your network connection. You may even have a high speed connection, but if you have set your bandwidth too low or too high in Firestorm, you will be causing lag for yourself.
Determining the optimal value for bandwidth in Firestorm is explained on on this page.
Other things that are known to affect connection speeds are firewalls and anti-virus software. So if you still experience network-related lag, you can try disabling these, temporarily, and seeing if things improve. If they do, then you may want to consider replacing firewall and/or anti-virus software.
In SL, you can reduce bandwidth usage (and thus network lag), by looking for and identifying items which cause frequent updates between client (the viewer) and SL servers. Many objects cause such updates; some you will need or want to keep, but you may be able to eliminate others.
To get a visual indication of what objects cause updates, go to top menu, Develop → Show info → Show Updates to Objects. (Press Ctrl-Alt-Q to enable Develop on the top menu, if it isn't.) This will enable colored trails above objects that are updating. Each color has a different meaning3):
Red: Indicates a full update, such as the creation of a prim. This is a relatively large data packet sent to your computer. If you see objects that are showing a constant stream of red, they're contending for your bandwidth, which may cause other things in the area (like textures) to load slower. If the object is made up of many pieces, the packet is larger.
Blue: Indicates a partial update, such as a change of position or color for a prim. These are always smaller than full updates. However, the same rules apply as for the full updates. If you are creating content, it's a good habit to make sure it's not updating many times per second. Changing colors, textures, shape, or particle parameters several times per second causes partial updates that contend for your bandwidth.
Green: Indicates an ending update, such as the deletion of a prim. If this packet gets lost on the way from the server to your computer, the object becomes a “ghost” – your viewer still renders it, but you can walk through it, and when you edit it, the Creator field is blank because the object no longer exists on the server.
You can disable showing of updates by unchecking the setting mentioned above: Develop → Show info → Show Updates.
Objects that update are generally (but not always) scripted. However, many scripted objects do not constantly generate updates. For example, a scripted chair that is not in use, is “idle”. It does nothing, and therefore isn't generating netwrok traffic.
NOTE: Some effects are in-world only; they cause things to change visually but are handled entirely by the client, thus do not create any network (or region) lag. These include: particles, texture animation, client-side rotation.
