Moss arrows spawn blobs of moss that coat the floor under the impact. This moss is virtually silent to walk on.
Shooting a water arrow into the moss will cause it to spawn more.
Currently, AI pay no attention to moss; however this may change in the future.
Moss arrows can also be used to coat brekable glass so that it can be broken silently.
Moss can also cushion a fall, resulting in less damage if you're falling a long way. [is this implemented yet?]