And that would be exactly why nobody is doing it

Heres a idea im just throwing out in to the public view , what if it was set up like a layer system you have your water as the background and then your background and then for the terrain just cut out areas so you can see the water its not dynamic water , but its close a enough.

Cause that's totally not how every MO is rendered anyway.

So exactly like the hydro mod?

I'm thinking about a possible way to do semi-dynamic water.
My method involves deviding the scene into parts; then
assigning each part a status of empty, water, or, solids.
(empty means no settled material, water is where water is,
solids are were settled material inhabits most-all of the part)
In game it would check each part if its status has changed, then
check for empty parts beside or below water, then the water would
move into the empty squares.

You could do that, but if the scene were divided into 24x24 blocks, for instance, there would be strange-looking holes that it can't fill. If it were smaller blocks, then it would start to lag a lot.

Sounds like Spelunker-ed water to me, and would look majorly retro.

I'd give it a go, if I had any idea how to go about it.

@ The Last Bannana
I was thinking the other way, filling those irregular holes,
but then it might "leak" through your base's wall. I think that
a possible fix to that problem is checking only the pixels next
to the water tiles. And, to simplify stuff, it would only need to define
the squares next to water.
On another note, I would do this, but I am not very capable of writing
lua. (or any other language except english) And before you nail me
on how easy lua is I might as well learn.

The main issue with your idea is that it's fairly complicated to do all those checks. You're welcome to give it a try, but I don't think it'll run as well as you're expecting.