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Once you beat level 1, you can then see on the top right corner of the challenge description a button to increase the level.
There are two types of levels: Some increase the Rank of the challenge (for example, Snuffhead's Bane can be played at Rank E, D, C and B at levels 2, 3, 4 and 5). Ranks increase the baseline difficulty of all monsters (even from previous zones). These challenges have a level cap equivalent to the highest Rank available at the moment (so Rank B as of now).
Some Challenges however have custom designed ways to scale indefinitely. These might increase the enemy's HP per level, or Corruption gained, and so on. For these Challenges there's no level limit; Some players have reached extremely high levels at Dwindling Fire (1000+). I believe I hold the record for Endurance of Vild (Level 111 I think) and some other challenges (like Fernanda's Scaling Hell) become extremely hard very quickly (at level 10 it's extremely tough, right now I'm stuck at level 17).
So there's a very wide gamut for progression. Challenge difficulties were added to increase replay value and also to allow veteran players to further scale the game to a difficulty that's satisfactory for them.
Finally, Challenge Levels act as a multiplier over Soul Coin gains and dropped Equipment Quality. So the higher the Challenge Level, the bigger the odds you'll find higher tier Equipment, and the more Soul Coins you'll gain.
Rank Scaling:
F (Normal) - Snuffhead's Favourite
E (Normal) - Crippled
E (Normal) - All of Sifd's Suggestions
D (Normal) - Shopkeeper will never come back?
D (Normal) - Tainted Soul
F (Hard) - Snuffhead's Bane - One of the hardest challenges to complete at level 4 and 5 (Rank C and B). Has a humongous Soulcoin Gain Multiplier. This one is truly hard and not recommended unless you're looking for a way to test your skills and knowledge to the limit. Completing Snuffhead's Bane Level 5 with 500 Corruption is a bragging milestone.
E (Hard) - Plexus' Sadism
C (Hard) - Risk of Monsoon
Infinite Scaling:
D (Normal) - Descent Into Hell - A lightweight version of Fernanda's Scaling Hell. It's known to be completable at level 1000 and because DiH has no limitations (most challenges disable something, like the shop, or passives) it is the easier way to scale difficulty of the base game in a steady way indefinitely.
C (Normal) - Vild's Curse
B (Normal) - Dwindling Fire - Can drop the highest tiers of equipment in the game (MAX) at high enough levels and is the go-to method for most people to farm gear upgrade. Not sure what the current record is but I think it's in the 1200s.
D (Hard) - Fernanda's Scaling Hell - Likely the most brutal scaling in the game as of now. Experience is reduced by 85% stacking (so 15% Exp, then 2.25%, then 0.3%) meaning that after level 5 or so you no longer receive any experience from enemies. I believe current record is mine at Level 17.
C (Hard) - Endurance of Vild - This is where you can test your damage-dealing capabilities as enemies get progressively more health. At Level 110 the final boss has HP in the Nonillions. This one was designed by me to offer truly hardcore players a way to put their Octillions of damage to use.
B (Hard) - Cooled Steel - Along with Dwindling Fire, this can be used to farm gear and soul coins as it scales reward very fast with levels, but due to being much harder I believe Dwindling Fire is the go-to.
Each one of these that I commented require special techniques (people will gladly share their strats on discord) to progress further after the first few levels, as they test your knowledge of the game in different ways.
Once you complete an infinite scaling challenge at level 5 (I believe) you gain access to the next 6 levels at once (so level 5 unlocks 6-11). This is to avoid excessive grinding if you're able to jump multiple levels at once.
No problem, glad to be of help. If you have any more questions feel free to ask.
I keep seeing people say they start with X (ie 100, 500, etc) corruption in addition to scaling the challenge levels, but I cant seem to find this feature in the game. Is it something I just haven't unlocked yet or am I missing something?