Simulating the physics of water has always been tricky, and game engines sometimes still have to use dodgy mechanics to make it feel real. But the above demonstration of this new fluid simulation technique proves that slowly but surely we're getting there.
PhysXInfo has the details on how it works:
Position Based Fluids is a way of simulating liquids using Position Based Dynamics (PBD), the same framework that is utilized for cloth and deformables simulation in PhysX SDK.
Because PBD uses an iterative solver, it can maintain incompressibility more efficiently than traditional SPH fluid solvers. It also has an artificial pressure term which improves particle distribution and creates nice surface tension-like effects (note the filaments in the splashes). Finally, vorticity confinement is used to allow the user to inject energy back to the fluid.
According to PhysXInfo, it is running in real-time on a single GTX 580, which makes the whole thing even more impressive.
Position Based Fluids Demonstration [YouTube]