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.
Because it involves a constantly circulating supply of liquid to keep the CPU cool, rather than just a hunk of metal, a closed-loop liquid cooling system is more complicated than an air cooler. A liquid cooling loop needs a water block (comprising the heat sink and heat exchanger), a pump, a radiator, fans, a reservoir for additional liquid (because the more liquid you have, the more heat capacity you have), and the tubes and fittings to connect all of these parts together.
So why even deal with the added complexity? First, a liquid cooling loop can be be significantly cooler and quieter than an air cooler. And the part that attaches to your CPU is much smaller. Rather than having a two pound, six-inch cube of metal fins hanging from your motherboard, preventing you from using RAM with tall heatspreaders, and maybe even cutting into the space you need for your graphics card, you just have a small water block and some tubes leading elsewhere.
Air cooling is goog and cheap.You can get a great aftermarket air cooler that will lower your CPU's burn temperatures by 20-30C for about $30 (that's the Cooler Master Hyper 212+ or Xigmatek Gaia). Results scale pretty well from there to about $90-100. The air coolers you can get in that price range are massive collections of copper and aluminum, with multiple cooling fans--your Phanteks TC-14PE,Noctua NH-D14, or Prolimatech Megahalems. These represent the best air coolers on the market.
There are two substantial advantages to using an air cooler rather than a water-cooling loop at all: first, fewer moving parts. A giant heatsink with a nonoperative fan is still a giant heatsink, so you'll still get some cooling even if your fan dies, and the fan is essentially the only thing that can go wrong. For a liquid cooling loop, your fan could die, your pump could die, your tubing or radiator could start leaking...the list of possible failure points is greater.
The second advantage is that the airflow from the CPU cooler actually helps cool motherboard components, especially the voltage regulators, which typically lie directly in the airflow path between the CPU cooler fan and the rear exhaust fan. Without that CPU cooling fan it's easy for them to get toasty, so you may need more fans in your case than you would otherwise.
The easiest way to get into liquid cooling is with an all-in-one loop. These consist of a single closed loop with a radiator on one end and a pump/water block combo on the other. The system is pre-filled and pre-sealed so you don't need to mess with it--just install the radiator and its included fan onto one of your case's existing fan mounts (usually the rear exhaust fan), attach the water block to the CPU, and fire it up.
Most all-in-one loops cool the CPU only. There are some all-in-one loops for GPUs, like the Arctic Accelero, but if you want to liquid-cool more of your system than just the CPU, you're looking at a custom setup.
The vast, vast majority of all-in-one liquid cooling loops come from just two OEMs: CoolIT and Asetek, with CoolIT powering some high-end Corsair loops and Asetek providing essentially everything else.
An entry-level one-fan, one-radiator all-in-one liquid cooling loop starts at around $60 and cools about as well as a midrange aftermarket air cooler. This includes the Corsair H55, NZXT X40, Antec Kühler 620, Cooler Master Seidon 120M, and others. I wouldn't bother with one of these, frankly. I'd either get a bigger air cooler or a loop with a bigger radiator. Why? A bigger radiator will be more effective than a smaller radiator because of its larger fin surface area, so you can get the same cooling results while running your fans at lower speeds--which means less noise.
A great dual-fan liquid cooling loop will be in the same price/performance range as a top-notch air cooler. These can consist of a double-thick 120mm or 140mm radiator, or a 240mm or larger one. A 120mm or 140mm radiator will be the most compatible with current cases--larger radiators need to be mounted in places other than the rear exhaust fan mount, like the top of the case.