The game engine, which is called CryENGINE started out as a technology demo for NVIDIA to show the capabilities of the GeForce 3. The game has a very long draw distance which reaches far out into the world and the level is loaded without pauses. The engine can without problem render both vast outdoor areas of a tropical island and transition to inside areas, such as old World War II bunkers and other complexes which can be found through out the islands. Palms will sway in the wind and water will hit the beaches. Under the water, fish swim about and I can really say I enjoy the graphics and the environments in the game.
The engine provides a lot of eye candy, lens flare, water effects, a quite good physics engine (not Half Life 2 physics though). It makes extensive use of pixel shaders (such as water) and Polybump normal mapping. With the 1.3 patch, Crytek introduced HDR, High Dynamic Range, which if you stare directly at the sun and then looking away it will result in the beach looking darker than normal for a few seconds and then return to normal.
Still, even this far in computer 3D technologies, we have clipping and textures far away that will scale down even with everything maxed out. Targets at a far distance will fade-in the closer you get. Lowering quality on some graphics setting and plants will start out flat and will then pop up in high detail as you get closer.