Under normal circumstances, it performs the tasks of a complete Wet/Dry system, Fluidized Bed or Undergravel filter. It is called live rock due to the colonization of live bacteria -- the same that would normally be present in your biological filter
In a closed aquaria system, live rock is by far the healthiest and most beneficial means of biological filtration. As it resembles nature more closely, it is healthier for your fish and livestock as well. It also acts as a home for reef coral and other invertebrates.
Live rock consists of the calcium carbonate skeletons of long dead corals, or other calcareous organisms. Therefore the name "live rock" is really a misnomer as the rock itself is not actually "alive", but it does contain a multitude of life both inside and out. This type of live rock is good for use a base rock.
Rock that is devoid of external life that probably won't see much light that you can put other forms of more advanced live rock & corals onto to build your reef system base once your tank has settled and the base rock is seeded.
The rock now favored by most live rock farmers is the ancient reef rock.
You can also learn to make your own live rock for fun and profit with the AragocreteTM and Superglue Reef Aquarium method from GARF.
This is a fascinating technique that Sally Jo and LeRoy Headlee have developed over the years to propagate and cultivate your own corals from cuttings and gluing them onto your own rock. For more information about this process visit their Super Glue Research Project page.
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