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Thing is, Diffusal's active is amazing, whereas the extra dosh spent on upgrading Dagon could go towards something better... the stats on the item are truly horrible. The best part about the upgrade, I'd say, is the cooldown reduction.
There are two kinds of people in the world; those who can count, and those who can't.
Well the thing is Dagon is gotten early game. like 15 minutes is when you want lvl 1 by. this time period is where the actual impact is the greatest because heroes haven't got a big HP item or are still relatively squishy. thus 400 damage is actually decent. early game team fights are usually short sharp affairs with a more "burst " orientated approach. Why? because the heroes dont have the mana or hp to sustain through a fight and get off multiple skills multiple times.
now mid game you need sustain or disable items. i.e. scythe orchid euls bloodstone aghs. items that will let you live through a sustained fight and get off multiple skills yadda yadda.
as fights progress into late game they go for longer, im talking 15-30 seconds fight time and here is where a level 5 dagon comes in handy. the cd reduction allows for multiple uses in these fights and because you have the sustain for it, it is more useful. Also because the HP pools are bigger the upgraded damage is actually the same percentage as when it was lvl 1 (kinda) dagon scales better then people think but it still isnt core on 90% of heroes for good reason.
so most heroes that have a dagon in their core items usually go Core -dagonx1 -core -core -dagonx5 upgraded -core
and diffusal upgrade is just got 99% of the time for the charges. really, thats why you upgrade it. more charges. i see people upgraded diffusal with 4 charges left .... i get annoyed.
Generally best to avoid upgrading it at all outside of very specific heroes and situations ( Tinker :)). It gets a bad rep because a lot of people just buy it to KS, but it's a legit item when early burst will net a significant number of kills.
Upgrading a Dagon generally shows a lack of understanding and ambition - past a certain point it's very easy even for squishy supports to pick up a Casual Cloak, Point Booster or whatever. That's now 2500 extra gold you've got to find to still be able to 1-shot them. For most heroes who'd consider one, you're almost always better to be switching to physical damage items, utility, Octarine Core or whatever.
Ethereal Blade - very situational on many heroes, again, you might be best forgetting about burst at this point.
If I ever upgrade Dagon I either do that when enemy team has no coordiation and they just wander the map alone instead of tutrling or grouping up, or I do it for cooldown.
Imagine that you snowballed so hard you have Dagon 5 already but you have to get rax or your advantage will go down the drain. At this point, every 15 seconds youcan basically get most heroes out of the fight or make them stay, knowing they will be insta-killed 15 second later or once you decide to go upthe highround. Same way as Laguna Blade or Sonic Wave bullying is done, just better. Fighting 4 vs 5(or even 3 vs ) if they are super squishy is impossible unless they got some heave hg-defend lineup left alive.
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