stone
air
water & placed water at eye level
lava & me
lava
lava
burnt to death
lag
If you're in lava, it can't form obsidian because it's a solid block and you're occupying the block where it would form, I suppose. But depending on your armor you should have had enough time to swim up into the water fully, if that had happened the fire would've been extinguished and you'd take no more dmg from lava, so I suppose that didn't happen.
So I suppose you placed the water, and was half inside water and lava, but died before getting up fully into the water from the lava damage. How did the lag affect this situation?