Dye grenades are dual role items, useful for providing cover in exposed situations. Functioning in both water and land environments the dye is ejected as a particle cloud, producing an octopus like ink spray in water or dense air borne cloud on land.
Functionally identical to the Smoke Grenade of the First Alien War in theory, the Dye Grenade's effectiveness is almost completely nullified by its negligible area of effect.
Comparison to UFO: EUs Smoke Grenade
The dye grenade is a 10 kilometre (approx 6.21 mile) step backwards.
The dye grenade mainly differs from the Smoke Grenade in how its used. Instead of creating a medium but tight pack of cloud cover, the dye grenade first creates a small initial puff of dye and dust that provides little to no cover. Over the course of several turns it starts to thin and spread out over a larger area.
Because cloud cover provide the greatest protection within the first few turns after being released from the grenade, the way the dye grenade functions pretty much works against it.
It is very likely that the team responsible for the UFO to TFTD conversion may have mistyped the dye grenade's strength as 10 instead of 100.
A much quicker solution is to simply detonate an explosive such as a Sonic Pulser for a mild but instantaneous dust cloud cover over a large area.
Damage Type and the OSG
The Official Strategy Guide for TFTD (X-COM: Terror From The Deep, The Official Strategy Guide by David Ellis) mentions on pg 115 that the Dye Grenade does 10 Smoke/Dye and High Explosive. Also, the UFOpaedia lists this item as having a damage type of HE. While this is technically true, it is also very false. The smoke grenade flag in OBDATA.DAT overrides the HE damage and produces smoke instead. Testing has also shown that explosion is completely harmless to unarmored soldiers.