What's better?

[Chad]

Clients = Other people playing
Server = Server
Room = Game/Lobby

The arrows being packets traveling back and forth.

#1:
The server handles everything basically.

Good:
The Server handles room / game, so people can leave/join freely without the game/room closing for (x) amount of time. No host, so no one gets special super powers. It is purely depended on how fast your connection is. Rage quitting or pulling the plug will not end the game, it will only kick you. Lag switching will not work. Less BS in game, unless you suck.

Neutral:

Bad:
Uses a lot of Server resources. Less rooms/games because of lack of server resources unless you have a boss of a server.

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#2:
There is a "Man in the Middle" who does all the communicating with the server, therefor he seems to have super powers because he can send information faster, and receive it faster as well. All information is sent to him both ways before it goes in or out to the server/clients.

Good:
Uses less server resources.

Neutral:
Host has super powers due to being the fastest connection with the server and acting as the server it's self.

Bad:
Host can lag switch, end the game abruptly if angry, kick players, connection seems slower, more BS in game, even if you're amazing. Game/Room closes when the host is lost/leaves.

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Examples:
Gears of War 2, mostly uses #2. When the host leaves, the game ends. Gears of War 1, uses #1.
Call of Duty/Halo seems to have mostly found a mix in between both of them.

[HTML]

It depends on how much server resources you're willing to use IMO. I'd go with choice one if I could afford it, but then, going with choice twuld give you more time to spend budget / resources elsewhere even though people would be spamming:

"HOST HOST HOST HOST"