A water pipe percolator a sub chamber within the shaft of a water pipe (or other smoking instrument) that provides smoke-water interaction via heat exchange and dissolution. Percolators come in different forms, such as dome, pedestal, tree, and double helix. Depending upon the form of the percolator, it may or may not be diffused. However, the primary purpose of the percolator is to act as an extra chamber to filter smoke through water. As diffusers can mostly be found on male downstems, the only percolator that diffuses smoke is the tree percolator.
A diffuser works by utilizing a pressure differential between its bottom and top in/outlets. Reduced pressure at the outlet end is usually provided by the users lungs. The fluid at the inlet (i.e.: a smoke, vapor, and air mixture) is directed to the bottom of a column of water, where the pressure differential causes the inlet fluid to pass through the water in small pockets (liquid bubbles), and then rise to the outlet. In short, diffusers make smoke cooler, and rise evenly through the pipe, due to the water bubbles hitting the surface simultaneously.
The Daily Omnivore 
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