One idea was to introduce a combat drugs grenade. It would provide half the defense of a regular smoke, but would provide some offensive bonsues. It could grant a certain amount of aim/crit and possibly psi power as well. Dense smoke would still have an effect, increasing the amount of both defense and offense granted by the smoke.
I also thought about some way to mix in other defense ideas. For example what if you had smoke that gave an armor point to everyone in the smoke, and/or granting ablative points for each turn spent in the smoke. Leaving the smoke would remove the armor point, but the ablative would remain. The ablative idea would need to have some restrictions to prevent it from being OP, or maybe not included at all. A general thought about the ablative is perhaps it would 'repair' lost ablative, capping out at whatever ablative you started the mission with. An alternate idea was to have the smoke provide healing at 1 per turn, or have it heal hp until full, then apply ablative after that.
Another idea I had was to replace the defense granted by smoke to grant dodge instead. A baseline smoke could grant 25 dodge, while a dense smoke would grant 50 dodge. These numbers are just for example, actual balance might lower them. Granting dodge over defense has two major effects. It smooths out incoming damage more, and has less of a negative impact on the AI. There are currently so many ways to present an aim malus or defense buff that the AI often outright breaks. Fixing that is not trivial, but having less reliance on aim malus to decrease damage taken would help alleviate the problem a lot.
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Combat Smoke
Grants +10 Aim, +15 Crit, +10. Increases to +15 Aim, +25 Crit, +20 Dodge with Dense Smoke.
Defense Smoke
Grants +25 Dodge and +15 Will. Increases to +50 Dodge and +25 Will with Dense Smoke.
Healing Smoke
Grants +1 Armor, +10 Dodge and heals 1 HP/1 Ablative per turn. Increases to +2 Armor and +20 Dodge with Dense Smoke.