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1.
A place where a group of people who lags a game lives until their internet connection is out of the red bars and into the green.
Gamer: Man that guy is laggin up the whole game

Lagger: Sorry, I live in LagNation

Gamer: God kid, you and your Wal-Mart connection.
by ATX Crane May 17, 2011
 
2.
A play on damnation.

It is to express lag in a game (typically MMORPG's).
God, lagnation!
by Anthony Binas September 01, 2008