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Quick Definition

An item or ability in a game is considered nerfed if the developer alters it to be less effective. While this can be a disappointment for players that enjoyed things as they were, it often leads to a better game for everyone by ensuring that the playerbase doesn't become complacent or stick to a single strategy.

In some cases, the players figure out ways to exploit items and abilities in unexpected ways. For example, say a game has an item that allows you to teleport. A clever player might be able to figure out how to use this item to warp themselves into endgame areas well before they should be able to reach them normally (a trick known as sequence breaking). The developers might nerf the item's teleportation ability to prevent this from happening in the future.

On a side note, this happens more frequently in competitive multiplayer games than any other genre, as there's often an arms race between players searching for an exploit and developers trying to keep the game fair.