Summary
The waterfall was a decorative feature that was removed in the 2.111 update, released on November 19, 2012. The reason cited by Supercell for its removal was for performance reasons. As defenses became more numerous and more animated, it became necessary to remove the waterfall so that the game would continue to function properly and efficiently on older devices.
The waterfall was animated and could be found on the NE side of the village.
You can see it in the video below for the first 5 seconds or so in the upper right hand corner.
You can also see it in the pictures below in the upper right hand corner.
Another image of the waterfall from an early version of the CoC application files.
