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I made some progress thanks to this, but games and Steam Big Picture still don't work.
As my reference I was testing it with Legends of Grimrock and setting the game to Borderlands and Windowed mode and setting the resolution after that to 720p did not solve the issue. I was able to see the game cursor moving on the streaminig monitor when I moved it on my computer but with heavy delay. The picture remained frozen for anything else but the cursor. What was weird though is that once I opened the Grimrock level editor as a test, I was able to stream at 59-60 FPS for the first time just fine with 1-2 ms network and 8-9ms display lag. When I lauched it again the second time just to see if it was consistent after having changed the game resolution to 1280x720 through the options, I was getting 4-5 FPS with well over 500ms network lag, and 15.8% packet loss. Testing it again resulted in it working just fine. This was done with software encoding.
With hardware enabled encoding and the NVENC codec according to the overlay stats, same issue in Big Picture and the main menu of the game. Black screen with audio and input passing through just fine. I was also seeing my cursor move with heavy delay, but everything else was frozen. Opening up the Grimrock Editor, the resolution was lower than with software encoding, but I was able to go down to 1 ms network and 5-6 ms display lag and at a fluctiating 59-60 FPS. This is the log from when I closed the Grimrock Level Editor and went back to Big Picture and lost all video again:
I will need to do more testing when I get back from work, and looking at this log, it seems like the network is the issue, but I highly doubpt that it's the case because it's a business level unmanaged HP Procurve switch that I've had for well over 2 years without a hiccup until this. Plus, I did already try to hook up the Steam Link straight into my computer bypassing it completely, and I had the same issues.
I brought my Steam Link to a friend's place with a GTX 970 / Win10, and it was literally plug and play to get it to run. 60 FPS butter smooth gameplay right out of the box no issues what so ever. I am gonig to reset my windows 10 installation but first I need backup everything. It sucks that this might be the solution to my problem, but when I upgraded from WIn 8.1 > 10, I didn't do a clean install, so it might be a possible cause.
I'll update the thread if that fixes my issues.
I am able to stream everything at 60 FPS 1080p no issues what so ever. I don't know what was causing the issue, but it was definitively software related.
Topic can be closed.