What is damage scaling like in KI?

Sadly, I don't know the exact specifics. Some moves degrade the damage scaling by more, it would seem (perhaps it a move-specific property?), so I can't give you an obvious, universal answer, and running tests to determine all the cases is too difficult for me to do right now.
I will say that first hits (ie, hits not in a combo) always have 200% damage bonus applied to them; this only applies to the first hit in multi-hitting moves (like shadow moves), which means it's big for things like Jago's DP (which hits only once) and heavy moves in footsies. And there is some semblance of damage scaling that kicks in as you do a combo, so hits will slowly start to do less damage (and less potential damage and less meter gain) until it eventually hits some rock-bottom value. But because of things like KV and combo breakers, you're unlikely to hit this value very often in my experience.
Damage scaling does affect some decisions you make, though... for example, if you were to counter break early in a combo, your counter break punish does considerably more damage since it is not nearly as scaled, and it is more beneficial to front-load your counter-break punishes with heavies and shadow moves if possible so they are less affected by the scaling. But you can go into training mode and find the most damaging counter-breaker punish, learn it, and apply it in a match and you should be okay here... no need to learn several variations that depend on the scaling factors. Sorry for the non-definitive answer, perhaps this question is best asked to the developers?

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