It's from finishing the seiga questline, yes
it's a damage bomb ability, so you deal damage but also take damage from it
the chip extensions are
1) raises element up to a max of 30 (10 levels)
2) raises chip's HP up to a max of 300 (10 levels)
3) reduces the cost of chip activation up to a max of -50 (10 levels).
i'm not certain how damage bomb abilities really work in terms of damage output, so maybe someone else can help me out here.
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