

The CPU generates heat, which is conducted to the IHS (integrated heat spreader), or the shiny piece of metal with the CPU model written on it. The pump moves the cold water (and water overall) into the water block for the heat (CPU), and out of the water block.

Large reservoirs can hold more water, which means less goofing around with a funnel and distilled water. The reservoir helps during loop filling/draining, and thus while isn’t totally necessary, is extremely helpful. The reservoir funnels cold water into the pump (generally directly below the reservoir).
