It is in fact very possible, and the idea has been used for RO servers since there is no EQHost.txt-like file there. I have already created a semi-working one, but there is a disadvantage. It is VERY VERY slow
Might not be feasible for EQEmu since it sends tooooooo many packets =P
As u can see, even eqlive is very laggy, when compared to other newer games (lineage2, WoW, etc)
So, if you are thinking about LAN servers, then sure, otherwise another compression algo. needs to be used on packets, and another proxy needs to sit at server side to uncompress =)
Thats what I think atleast, and its what im working on.