Hydrostatic gel

Hydrostatic Gel is a component of the Powered Assault Armor worn by the Spartan-IIs. It's a blueish semi-liquid forming a layer inside the armor. It is likely one of the innermost layers of the armor, but it is not in contact with the operator's skin.

Design
It was designed by Dr. Catherine Halsey, a civilian scientist in the employment of the UNSC Office of Naval Intelligence section three, as a component of the MJOLNIR Powered Assault Armor. It's one of the main components alongside the Luminous Green Refractive Titanium Alloy (External), the Matte Black Alloy (External), the self re-generating energy shield, the Reactive Metal Liquid Crystal Layer(added to the mark IV and later models) and the pressure seal.

Purpose
One of the Hydrostatic Gel's main purposes and drives is to conform to the wearer's shape and body temperature, keeping the wearer from getting too hot or cold. The Gel has the ability to be pressurized to various levels, allowing it's wearer an amount of cushioning during hard impacts. This way, a wearer can survive falls from great heights or other similar conditions as long as the gel is pressurized.

Trivia

 * In the opening cutscene of Halo 3, John-117 is seen falling two kilometers, crashing down somewhere in the Kenyan jungle. It is later revealed that the gel layer took most of this impact, as John-117 is relatively unharmed.
 * There is an emergency exhaust port in the armor that releases Hydrostatic gel when the suit becomes too hot to prevent the wearer from being boiled alive.
 * In Halo: First Strike, Frederic-104 ordered Red Team to over pressurize their Hydrostatic Gel layers just before impact. It is also stated that doing this was risking nitrogen embolisms, but this was the only way to make a "soft" landing.
 * One possible reason that in Halo CE that you take fall damage is that the MJOLNIR Mark V doesn't have sensors detecting falls, therefore providing a constant amount of Hydrostatic Pressure, in which case, the Spartan-II inside would have to absorb the remaining damage. In Halo 2 and Halo 3, the Master Chief is equipped with the MJOLNIR Mark VI, which monitors movement and falls, and then increases or decreases Hydrostatic Gel Pressure accordingly, or it could just be a gameplay measure.
 * Severe or sustained trauma to the suit can cause the gel layer to become viscous, rendering it partially or completely ineffective (Master Gunns mentions gel layer viscosity as notable while listing the damage done to John-117's mark V suit at the start of Halo 2).