Waterleaf

Waterleaf was introduced in the 1.0.5 patch.

It appears as a very small, aqua-colored sprout. It grows in Desert Biomes (right in the Sand, no less) and can be cut with virtually any weapon or tool.

Waterleaf is a "higher tier" Herb (above Daybloom and Blinkroot, for instance) that is an ingredient in three alchemy Potions*:

Used in
1-3 waterleaf seeds will be dropped if it is cut while in full bloom. to make it bloom, it must be partially or completely submerged in water.
 * You can see this listing in-game by placing Waterleaf in the Guide's Crafting menu.