This makes me imagine a space station like data center in orbit that acts like a public cloud on earth, communicating directly with satellites and renting out processing time. I'm not sure how well economies of scale work when you have to pay for every kg you send up there, but it would be an interesting business model.

Stop imagining, in 2021 a cluster of computers were sent up to test this, and since then several instruments are in the works to make use of similar (but not same) CPU clusters.

As always, finding a system that is affordable and radiation tolerant is the problem.

Do you have a link to this?

Here is one paper by the group working on this.

Full disclaimer I had some code of mine and a paper that I'm not linking.

https://ieeexplore.ieee.org/abstract/document/9884906

Is is cheaper for a satelite to transfer data to a space based datacenter than to a ground based one? If not, what's the benefit of locating the data center in orbit? (Except, of course, that it's awesome.)

The bottleneck for orbital edge isn't software, it's hardware that can tack into an optical terminal and tolerate radiation. The edge analogy breaks down because the consumer isn't on the edge, the sensor is, and it's just a problem of doing heavy compute next to the sensor, then sending back a summary data product.

After that, networking is well understood.

IoT sensor aggregation is already a major edge-compute use-case, it's not just for reducing latency for end-users. In this analogy you're just co-locating the edge compute on the same LAN as the sensor. All of the orchestration, runtime, and framework concerns from existing edge compute systems still apply.

Edge compute isn't solved; it's an area under active and aggressive development. The Cloudflare Workers wasm runtime for example. And if you're selling satelite edge compute, what's your control plane? You need a config store etc.

Put differently; if I'm a satelite operator writing first-party software to run on my satelites, sure, there's no framework code to write, and I can just tailor the software to my satelite platform's hardware. However, if I'm selling colocated compute with ultra-low latency to third parties, then I need to build something that (IMO) looks very close, if not identical, to a current-generation edge-compute platform.

Why are we selling colocated processing on a piece of mass-constricted ultra-expensive hardware we have to launch into orbit again? That seems like a solution in search of a problem.

Bandwidth to send down results vs raw data? Ability to relay instructions directly from that data to the next satellite without a downlink and uplink?

Sibling thread provides some examples: https://news.ycombinator.com/item?id=34210236