A lot of the other commenters are correct that you in general try to stop the water by having a good shaft seal. Nevertheless no ship is completely water proof. The real trick is to handle the water ingress. Typically you would design the vessel to have a low spot where all the water collects and a pump to push it over over board. The real problem only comes when your vessel leaks faster than your pump can evacuate the water.
I dont know about boats, but heres an expanation on how a seal like that could work .Because of water’s surface tension a seal can be both watertight and allow the propeler to move trough it.
Imagine you close your mouth over a water bottle to make it watertight, you can still move the bottle with ease but water wont escape.
Depending on the size of the shaft, different methods can be used.
Seals, hydraulic bearings, oil, grease. Or a mixture of these.
Hydraulic bearing is just a small tolerance space in which pressurised liquid like water is used to stop water from flowing in the the bearing system.
But ships are designed so that certain areas can or have to be flooded.
But generally we can say that the solution is tight machining tolerances and combination of seals.
Because you dont want to just prevent water from coming in to the ship. You also want to prevent it from getting in to the bearing system, because it can disrupt the lubrication process. Along with prevent your lubrication from leaking out.
Lots of o-ring seals along with either water or oil lubrication or both in layers. No one seal will be perfect, but if you have enough of them the amount of water ingress should be enough for a bilge pump to deal with. In larger shafts they’ll pressurize the water/oil used for the seal and bearing lubrication so that the water will naturally want to flow out the unsealed end of the propellor shaft and not up into the boat.
[Here’s an example of the type of configuration](http://rexmar.net/uk/index_htm_files/93.png) (they’re all different yet somewhat similar). The water inside the shaft housing can be pressurized or the oil inside the inner housing or both.
Also it helps to know that no boat is 100% leak proof. Boats leak ALL THE TIME. Steel ships have bilge pumps running constantly… if you’ve ever seen a stream of water being thrown from the side of a ship at dockside, it could be some generator/electronics cooling outflow or the bilge pump.
There are various forms of devices called “shaft seals”. The simplest means is that there is something called “packing” in the space between the rotating shaft and the stationary tube around it. The packing is often much like string, often with something like graphite dust or wax added, and then compressed into that open gap with something called a “packing gland”. It’s very much the same as how you can use a tap or bib for a garden hose without water shooting around from around the stem (the axle on which the handle rotates).
More complex seals will sometimes involve arrangements like a series of rubber barriers, each of which fit rather snugly around the shaft. This can allow in some leakage, but it’s simply pumped back overboard.
Another thing to understand with the above explanation of the packing material and packing nut is that the packing material is designed to absorb water and use it as a lubricant and coolant. For my boat we are told to snug the packing nut down so we see a drip every 20 seconds when the shaft is turning.
There are dripless shafts also but the same principle is applied where water and the packing is what lubricates and seals.
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