Wear & Tear

Everything decays, given enough time. it's hard to keep your gear in good shape out in the wilds— swords chip, staves break, and armor dents. Nothing stays in perfect condition forever—especially given the rigors of day-to-day adventuring. Keep a good whetstone in your pack and a sharp sword in your hand to survive the dangers ahead.

Item Degradation
Items degrade with use, losing condition until they become useless. This is measured with notches—the more notches an item has, the more it has degraded. Items gain notches through damage, consequences, and critical failures, and must be repaired or otherwise restored using the correct skills, tools, and expertise to function properly again
Damaging Items
Any object that can suffer damage can become notched, reducing its functionality and quality—through scratches, chips, dents, and cracks. Objects generally fall into one of four categories: weapons, armor, magic foci, and miscellaneous items.

• Armor: If you are critically hit by an attack, your armor gains a notch of damage. Each notch reduces your total AC by 1.
• Unarmored: If you're not wearing any armor and are critically hit by an attack, select a random item in your inventory - that item gains a new notch instead.

Weapons

Weapons—both melee and ranged—gain a notch when you critically fail an attack (or other relevant action) with them. Each weapon notch reduces by one step the damage die you roll with that weapon (to a minimum of 1).

Multiple Dice: Some weapons roll multiple die for their damage (greatswords, for example, rolling 2d6). In these cases, one notch reduces the size of the largest die by one size category (see Type B).

Sustained Damage: A weapon's damage can't go below 1, but it can still gain additional notches. These notches must be repaired with relevant tools (whetstones, smith's tools, etc) to restore the weapon's damaged die.

Spellcasting Focus

A spellcasting focus (a bard's instrument, a wizard's staff, a cleric's holy symbol, etc) gains a notch whenever you critically fail a spellcasting action whilst holding it. Each notch reduces your total spellcasting ability by 1 for any action which involves that focus.
Magical Mishaps: If you roll a critical fail while spellcasting and are not holding a spellcasting focus at the time, the power strikes out and hits a random item in your inventory - that item gains a notch of damage

Miscellaneous Items

All other items gain a notch whenever appropriate—often when they take direct damage or are used in a failed skill check (such as rolling a natural 1 to disarm a trap with a set of thieves' tools). Each notch reduces the item's efficacy by 1, adding a cumulative −1 penalty to any roll made using that item. Using a lockpick with one notch, for example, will apply a −1 penalty to your lockpicking attempts.