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Beat ALL 8 stages in level 1 difficulty then clear ALL 8 stages in level 2 to unlock level 3 difficulty. Monsters become stronger and will require more hits to defeat them in each succesive difficulty level.
Unlock Level 2 Difficulty:
Beat ALL 8 stages in Level 1 difficulty.
Unlock Level 3 Difficulty:
Beat ALL 8 stages in level 2 difficulty.