from what i gathered from the manual, the engine sees a terrain as a mesh. or a series of vertices tied together. i know, that the large the space is between two vertices the more likely another entity is to pass thru.

so i would guess that it's solid along the tie lines, like walking on a net.
also, by default the engine will 'chunk' the terrain in sections so the engine can better digest it. you have to turn off chucking in order to dynamically deform the mesh.

i may be wrong in all of this, but that's how i interpreted the manual.

perhaps someone with a better understanding will confirm or correct me.