Terraforming
Terraforming is changing the nearby biome (blocks, monsters, etc.) using either Terraformer or Microformer.
It doesn't remove the ocean (endless liquid on planets like Arctic or Strange Sea). It also doesn't change the ocean liquid.
Terraformers
Terraformers (such as Eden Terraformer) are for global terraforming. They can change the planet type (when more than 50% of its surface is terraformed), thus changing its weather, outputs of Atmospheric Condenser, light levels during the day, etc.
Gravity and threat level (tier) are NOT changed by terraforming (so if you terraform a Moon to Eden, it will still have tier 1 and low gravity).
It costs Ancient Essence to use a terraformer. Terraforming takes time (the player must be on the planet during that time) and is applied gradually. Total cost of terraforming depends on the size of the planet (15000 Ancient Essence can terraform 100% of a Small-size planet).
Terraforming won't affect the underground layers (only Surface layer).
Microformers
Microformers (such as Wild Microformer) only change a small area around them (400x400 blocks). They work anywhere (underground, in Space layer of the planet, etc.) and can create subbiomes that don't have their own planet type.
Microformer doesn't cost anything to activate it, but it gets destroyed afterwards.
Random microformers often drop from Ancient Guardian bosses.
Crafted terraformers
Most terraformers/microformers can be researched in Engineering tree, although they require a lot of Research. Craftable microformers typically require Durasteel Bar (tier 4 material), while terraformers require Densinium Bar (tier 6).
If you have already beaten Ruin, then you can buy some terraformers (NOT microformers) at Terraforge (a shop at the end of Ancient Vault, a post-game vanilla dungeon). It is much cheaper and doesn't require research, but you must defeat a mini-boss to get to it.