Water being homogenously mixed with air yields a smaller percentage of available O2 per unit.
Ideally, you'd want to limit the combustion chamber's floor and walls, keeping ("dry" water not included) mixture as close to the spark plug as possible, and in an oblong-ish football shape, which enhances the flame front to spread at the fastest rate possible. (This is evidenced by modern piston design, which limit access to the intake valve, concentrate fuel mixtures nearer the exhaust valve to take advantage of heat, and propagate an initial flame front in a sort of oval shape.)
To do this, a valve at the bottom of the piston's travel could be used, to ensure that any water/steam introduced would "pre-compress" any mixture in the cylinder. Keep in mind that this would also increase cylinder pressure, which technically would act sort of like boost, except it wouldn't really increase VE.
That's how I understand it, at least. The best thing I can tell you is to try it... the worst that happens is you have to replace some rings and bearings, right?
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