I guess since this works with WHDLoad games, what WinUAE is actually doing is capturing all the mouse/joystick/keyboard events, sending them to the other player's WinUAE which decodes them, and then simulates the corresponding player's mouse/joystick/keyboard events. Surely this could be done with hardware. Something like this maybe:

The red lines represent player 1's joystick movements and the blue lines player 2's. The "Kaillera box" passes the player's own joystick movements straight through to the Amiga's joystick port. It also somehow encodes them and communicates them, through the network, to the second player's "Kaillera box". This decodes the joystick movements and outputs them to the player 2 joystick port.
It's totally hardware-based. As far as the Amiga is concerned, there is a real joystick plugged in to the port.
Could something like that work?
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moto