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The Kraken is a sea monster that can attack, and even sink, ships on sea location types. There is a random chance of it attacking a ship and, once it attacks, if the crew does not successfully kill it or chase it off (by dropping its health by 50%) within five game days, it can sink the ship. Depending on ship type and size, this action may result in a sunken ship. The crew may die, or be shipwrecked on the nearest beach location type, depending on distance from land and other factors. If smaller ships, like a dinghy or longboat, are attached to a larger ship, and the larger ship is sunk, the crew will be automatically transported into the smaller ships (provided they would normally have access to them via keys or lack of locks) without being harmed. Spears, polearms and ranged weapons (such as a crossbow or composite recurve bow) are most effective against the Kraken.
When killed, the kraken drops a vast amount of calamari and horn, and sometimes (depending on random chance) additional special items like the Dire Spear of the Old Ones.
In 1830 Alfred Tennyson published the sonnet The Kraken, which described a massive creature that dwelled at the bottom of the sea:
Below the thunders of the upper deep; Far far beneath in the abysmal sea, His ancient, dreamless, uninvaded sleep The Kraken sleepeth: faintest sunlights flee About his shadowy sides; above him swell Huge sponges of millennial growth and height; And far away into the sickly light, From many a wondrous grot and secret cell Unnumber'd and enormous polypi Winnow with giant arms the slumbering green. There hath he lain for ages, and will lie Battening upon huge seaworms in his sleep, Until the latter fire shall heat the deep; Then once by man and angels to be seen, In roaring he shall rise and on the surface die.
(Source & full article: Wikipedia)