"Knockout" is a special blending mode, turning a layer to a kind of a "mask" for all underlying layers except for the Background layer (more about).

To create this effect:

1. In the Layers panel, select a layer that should serve as a mask. (On the screenshot, it's the text layer "LIFE".)

2. Now, in the "Knockout" menu, you have to choose a knockout type (fig. 2) -- either "Shallow", or "Deep".
- The "Deep" knockout "punches through" all the layers except for the "Background". Visually, the "mask" gets filled with the "Background" layer's contents (fig. 1).
- If you want to stop the effect before (over) the "Background", choose in the "Knockout" menu the "Shallow" item, and then group the "masking" and the "masked" layers. In this case, the "mask" gets filled with the contents of the next layer after (under) the group.
- If you want to punch through the "Background" (to transparency), convert it to regular layer (Layer > New > Layer from Background) or just hide it by unchecking the "Visible" gadget.

3. Once you have chosen the knockout method, reduce the layer's fill opacity to zero. If you decide to show the "punched" layer contents, slightly increase this value (fig. 3).

4. To turn off the effect, select "None" in the "Knockout" menu or increase the fill opacity to 100%.

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