It can become a big problem, when there is a lot of them, for instance:

When i turn on 1 layer (instead of water must be air), fps drops from ~40 to ~30:

When i turn on all layers - fps drops to 10-15:

And if i try to jump into this mess and place/remove blocks - it becomes extremely unstable, often dropping to 1-2 fps:

And, even when only 1 layer visible - i still can't what i need to place, making building underwater kinda imposible.

Hmm strange, I don't get any noticeable FPS drops with the overlay/schematic, when I place a large-ish schematic underwater, or go inside it. But I did hear it from someone else as well that their FPS tanks if they are inside a schematic. But I have no idea why being inside it would make any kind of a difference...

As to the overlay inner sides, I'll add a config option to disable them I guess (to still be able to have them if someone prefers that).

But I have no idea why being inside it would make any kind of a difference

It's because textures are closer => must render more pixels.
When you have proper GPU - difference is negligible, but when you have GPU build in potato-ish CPU, like in my case...

Huh, really? How is that different from standing near normal placed blocks then? Although one thing that is different is that the overlay is translucent, and the vertices get sorted and the VBO re-uploaded any time the player moves. But still, that should also happen whether you are inside it or not. Maybe it has something to do with that sorting of the inner sides or something(?) I'm rather a noob when it comes to rendering stuff...

But if it's nearly unplayable for you currently, maybe disable the overlay at least for the extra blocks in Visuals and then refresh the schematic rendering, or even disable the overlay rendering completely.

Well... If only disabling overlays wouldn't mess up rendering))

And even if i make litematica blocks transparent - it still flickers:

When overlays are on - there is no flickering. And litematica blocks doesn't draw in front of water, when they behind.

Drawing in the wrong order with water isn't caused/fixed by the overlay, it's a generic issue with render ordering. It's on my TODO list to try to rework the rendering hooks a little bit to hopefully fix some of these render order issues. Basically currently stuff renders in the wrong order in relation to client world blocks that have translucency or transparency, such as water or slime blocks or stained glass.