The Water Staff is crafted using a shapeless recipe containing a Staff and a Water Essence. Left clicking performs a regular attack, but right clicking will shoot out a water bubble similar to the bubble attack the turtle boss performs, that, if it hits, will carry a target up into the air and drop it from about 10 blocks above the ground, inflicting fall damage. However, if there is a ceiling above the enemy, this attack can also inflict suffocation damage as the target floats into it. The enemy may also be pulled through the ceiling and land on the block it traveled through. It has been banned on some servers because it can easily be abused as a way to "troll" other players or transport a player through a solid wall.
You can obtain the Water Staff naturally from mid to high tier Better Dungeons chests or mobs.