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Difficulty is the challenge rating of a NPC or mob. The ratings are: Weak, Standard, Strong, Elite, and Boss (or Champion). Difficulty can be identified quickly by icons next to NPC and mob nameplates. Strong shows a silver icon; Elite, a gold star; Boss, a silver V over a gold star.
Story Mode (Normal)
Allows an entry level of mechanics for players to focus more on the story or experience rather than challenge themselves.
Only some bosses in SWTOR feature "Enrage" timers which if the boss is not killed at the end of the timer, will increase the damage of the boss significantly often wiping a group. Some bosses feature "Soft Enrages" which after a condition is met the boss will receive a special buff that often increases its damage and/or changes some mechanics for the end of the fight.
Veteran Mode (Hard)
Provides a moderate to substantial amount of increased difficulty.
Nearly every boss and some mobs are given increased damage, increased enemy health, additional mechanics, and enhanced mechanics that were present in Story Mode. Enrage timers are shortened in Veteran Mode. This difficulty yields improved and/or exclusive gear and rewards.
Master Mode (Nightmare)
The highest difficulty within SWTOR, and requires the best gear and highest amount of team/self coordination.
Master Mode (often called NiM for Nightmare) offers significantly increased damage from all enemies, further increased enemy health, additional punishing mechanics and enhanced Veteran Mode mechanics. Enrage timers are often further shortened in Master Mode making DPS requirements high. Rewards from Master Mode encounters often give out very exclusive rewards for your dedication.