Terrain LOD is the distant ground and large (cell sized) bodies of water.
Use xLODGen terrain LOD beta to generate terrain LOD meshes and textures. See xLODGen for more.
At the moment DynDOLOD does not create, update or otherwise change terrain LOD or water LOD.
How the LOD water looks is defined by the LOD water record defined on the worldspace record of the highest plugin at generation time, which is copied to create the DynDOLOD and Occlusion plugins.
Object LOD generation uses terrain LOD meshes to optimize the object LOD meshes by removing any triangles that are below the terrain or water planes. Hence terrain LOD should be generated before object LOD.
In Skyrim Special Edition and Skyrim VR the terrain LOD meshes are being lowered in the distance - which is baked into a shader. Presumably this is done to counter z-fighting with object LOD.
In any Skyrim version, the full terrain textures fade in a fixed circle around the current center cell to the diffuse terrain LOD texture. This fade does not use the normal map terrain LOD texture.
The distances of the terrain LOD levels can be controlled with below INI settings - either in the DynDOLOD SkyUI MCM or the Prefs INI.
fSplitDistanceMult=multiplier of object LOD Levels
The multiplier multiplies the object LOD distances for the different LOD levels in order to define the distances for the terrain LOD levels. If the multiplier is near 1, both object LOD and terrain LOD switch their LOD levels at the same, which makes it even more obvious.