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Fun Fact: James Cameron wrote the entire scene with the water monster - the "pseudopod" - to be removed from the movie if the effect could not be completed/done. I believe that the only other fully CG "character" before this was the stained-glass man from Young Sherlock. There are several techniques going on with the pseudopod here as it is a liquid material we are able to see through: 1) it refracts everything behind it, causing everything to distort and 2) we are seeing reflections on the surface of the material. If I recall correctly, the way that these effects were achieved was that pictures of the set were taken from every possible angle and stitched together using a self-made program called "Photoshop"