PC building is a gateway drug. It starts out innocuously enough--picking out components, researching cases, hard drives, video cards, and so forth. And then you find out that you don't have to use the CPU cooler that came with your CPU--that there are aftermarket coolers that can make your CPU run even cooler, so you can overclock it more. And then next thing you know your credit card company is calling you to make sure you really meant to buy $200 worth of MOSFET and southbridge waterblocks from Slovenia.
So what is water cooling? How does it compare to air cooling? Is it even necessary?
First, let's cover the basics. Electronics turn energy into calculations, and the byproduct is heat. The hotter your processor, the worse it performs--modern CPUs will clock themselves down and finally shut off before they damage themselves, but in the old days it was easy to fry your CPU by running too hot. You can increase the performance of your CPU (and your RAM, and your GPU) by overclocking and overvolting, but that requires more energy, and thus puts out more heat. Basically: the better you cool your components, the better they'll perform and the longer they'll last.
If you recall from thermodynamics lectures, heat likes to equilibrate. So if you put something with the capacity to absorb heat next to something that is hot, and as long as there's some way for heat to transfer between them, the hot thing cools down and the cool thing warms up until they reach equilibrium.
All CPU coolers work in the same basic way: A heatsink, usually made of copper, but sometimes aluminum or nickel, sits atop the CPU's heat spreader (that's the square metal plate on top of your CPU). A thin layer of thermally conductive paste also sits between the CPU heat spreader and the heatsink, to smooth out the microscopic gaps between the two metal surfaces and provide as much heat transfer as possible. On an air cooler, the heatsink has special heat pipes attached within it or on top of it. The pipes themselves are filled with a fluid that vaporizes as it heats up and rises to the end of the heat pipes, which are usually festooned with thin aluminum or copper heat fins. These fins provide as much surface area as possible. A fan (or several) provides a steady stream of cool air over these fins, and as heat transfers from the fins to the air, the air heats up and the fins cool down. The fins cool, the heat pipes cool, the heatsink cools, and presto, the CPU cools.
In a liquid cooler, liquid flows through channels carved directly into the top of the heat sink, and is pumped away from the CPU toward a radiator (which actually cools via convection). The radiator has a fan (or several fans) that constantly blow over its fins, heating the air and cooling the fins. The fins cool the radiator, which cools the water, which is constantly circulating through the loop and keeping the CPU cool. Whew.