Leveled is a term that refers to an item, NPC, etc. that increases in level as the player character levels. It is a method of coping to prevent low-level players get high-quality weapons and armor quickly, keeping difficulty up and also reward higher-level players with the items.
For example, if one is at level 10, they may find Iron-tier weapons and Hide Armor in a chest. Alternatively, if one is at level 50, they may find Glass or Daedric weapons and armor in the same chest.
Leveled items will continue to level with the player until they are interacted with. Thus, it is best to wait until they have reached max level and therefore max potential.
This concept is applied to various weapons that can be found in-game. For example, Chillrend, widely touted as the most powerful one-handed sword available in vanilla Skyrim (Miraak's Sword is the most powerful one-handed sword in Dragonborn). However, this is only when the player is after Level 45. If it is found before that, it will stay locked at that of a Daedric Sword or less.
This creates a very dynamic situation regarding the game's best weapons. For them to be the best they can possibly be, one must hold out for an extended period of time.
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