What does Interpolation Target do in NetworkTransform component?
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The main purpose of Interpolation Target is to separate the tick based simulation states from what is presented to the user (lerped/interpolated views). In the case of NetworkRigidbody for example this is critical because you do not want to manipulate the transform of the Rigidbody directly to interpolate it, as this would dirty the transform and it would affect the Physics.Simulate() call in the next simulation cycle.
Normally in Unity this is a non-issue because Rigidbody interpolation is automatic and Unity hides that it is doing this. When manually simulating PhysX (which is necessary in Fusion for prediction) Unity does not interpolate Rigidbodies, and this separation of state and presentation becomes necessary - as Fusion now has to manage interpolation.
Interpolation Target is what gets interpolated in LateUpdate() and should contain no physics objects. It gives you specific control over what is considered "cosmetic", and it should not contain anything that represents state (like colliders).
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