When an attack Penetrates, it bypasses some of the enemy's Protection, meaning it does more damage than a normal attack. Because it bypasses some protection, it's as if you are hitting a target with weaker armor equipped.
Penetration Rating is the stat that controls how often you will penetrate. Penetration Rating is opposed by Block Rating, which increases the chance to block attacks (blocked attacks deal less damage and do not penetrate).
Also see: list of penetration abilities.
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