My subway below spawn is moving along nicely. There are now stations in each of the 4 directions 500 blocks from the spawn station, and a stairway exit to the surface at each. It's only a walking path now, but as soon as I can get some efficiency/unbreaking diamond picks, I'll expand all the tunnels to 3x3, and eventually install rails as well. Currently, the south tunnel is probably the most useful, because it comes up on a beach next to the sea on the south coast, so can be used for oceanic expeditions. (BTW, the service has no limit on the world file size, so no worries about exploring to your heart's content). Outside of the West station, if you head north, there are horses and some donkeys, but to get them back, the tunnel needs to be expanded to at least 2x3.
ALso, down in the mine (there' a small hole near the path in front of the enchanting building, then follow the cobble path inside the hole) I created a simple lava smelter that uses chests and hoppers to feed buckets of lava to the furnace for mass smelting. I managed to create more than a small chest worth of smooth stone with it so far. I need to expand it to multiple furnaces to make the process faster, though.
Been having a bit of block lag myself today, but nothing as bad as you're reporting. And yeah, quite a difference between raw throughput, and latency on an internet connection.
EDIT:
One thing we might want to do is enclose the Nether portal near the spawn point, because as it is now mobs can wander into it, get transported to the Nether, and be waiting for you when you come out of the portal. My first trip to the Nether on this server lasted about five seconds, because a creeper was standing right next to the portal on the Nether side.
This is what I've been working on today, and yeah, saw the results on the other side...
EDIT2: Just did a server restart after noticing CPU and RAM were pegged. After the restart, with me and LTK online, it was running more like 40-60%, so sounds like some kind of memory leak issue, so I'll keep an eye out, and do regular backups and restarts. Let me know if this helps your issue, Snalin.