I went through the sources and pieced together the hidden truth behind the Damocles Crusade. Here is my summary and analysis:
The figure behind it all is Aun'Va, the Master of the Undying Spirit.
After the T'au made contact and assimilated the human outcasts and exiles, Aun'Va realised that they were lost remnants of a vast and mighty galactic empire. Using his Gue'vesa agents and spies, Aun'Va studied the Imperium and its rulers, the High Lords of Terra. He found out that while powerful enough to drown the T'au in blood, the Imperium was a realm in decline. After the Redemption Wars, the Imperium was exhausted and depleted. It was forced to avoid wars it could not afford whenever it could.
Aun'Va concocted a Kauyon plan to lure the Imperium's forces into Sept Space, where they would be overextended and then hit them hard. A controlled conflict to condition the Imperium into believing that wiping the T'au Empire would incur an incalculable cost.
As bait, Aun'Va masterminded a campaign of espionage and diplomacy on the Imperial worlds past the Damocles Gulf. In what would be termed the Silken Conquests, the Imperial worlds in the Timbra subsector were assimilated into the T'au Empire without a single shot being fired. As the tithes from the region dried up, word reached the High Lords of Terra of human worlds under the thrall of Xenos. Their response was slow, but it typified the Imperium's bellicosity and overwhelming power. The Damocles Crusade was launched.
The Crusade fell on T'au colonies in the Timbra subsector. Aun'Va engineered it so that these colonies would fall after giving token resistance. Made confident by their "stunning" victories, the Imperials pursued the fleeing T'au colonists into Sept Space.
The Imperials subjected the T'au left behind and the Gue'vesa citizens of the conquered colonies to obscene brutalities. The atrocities committed on Vior'los were especially horrendous. All these ruined and destroyed lives were sacrifices Aun'Va was willing to make for the Greater Good.
Using the Warp Drives, the Crusade fleet bypassed the outlying T'au defensive fleets on their side of the Damocles Gulf border and encountered Dal'yth Sept. The Crusade fleet charged forth and bulldozed its way through the outclassed defensive fleet of the sept. Though the Crusade fleet suffered enough significant damage in an ambush at Pra'yen for members of the crusade command to voice the idea of turning back, the prospect of conquering the core T'au world of Dal'yth Prime proved to be too tempting.
The Imperials fell into the trap. On Dal'yth Prime, the T'au, led by their brightest and most talented commanders, dug in their hooves and made their first true defensive action. Though the T'au were prepared for the invasion, the Imperials made considerable gains owing to the scale of their numbers and the fury of the Space Marines.
Farsight and Shadowsun combined their meta strategies against the Imperial invaders. Shadowsun's infiltration and misdirection tactics threw the Imperial forces into disarray. When the Space Marines responded to her attacks, her stealth teams would withdraw, and Farsight would fall on the Space Marines and slaughter them. The T'au counterattack smashed all Imperial beachheads and retook all the occupied territory save for the one defended by the Ultramarines. Had this zone fallen, the Imperials would have been swept clean from the surface of Dal'yth Prime. As it turned out, the Ultramarines had a trick up their sleeves. Identifying the T'au weakness to psychic powers, they convinced their allies to mass-deploy combat psykers against the T'au forces.
The T'au forces were wrong-footed by the Imperial "Mind Science", turning what would have been a crushing victory for the T'au into a grueling stalemate.
Eventually, the T'au would take full measure of the Imperials. Using EMP tactics, the T'au would cut the Imperial invading forces into chunks and begin dismantling the Imperial war machine piece by piece. Furthermore, Farsight cracked the Codex Astartes. Thanks to the Hammer of Dorn's rigid obedience to the codex, Farsight managed to swiftly codify its core tenets from observing them. The Marines' dogmatic adherence to a set of tactics and strategies proved to be their undoing. Shadowsun and Farsight combined their efforts once again against the Space Marines, inflicting heavy casualties.
The Crusade's momentum was being bled out. The promised reinforcements from the wider Imperium did not arrive. A task force carrying a dozen regiments of the famed Cadian 18th sent to reinforce the Crusade was lost in the Warp. The T'au, on the other hand, bought enough time for fleets and forces from five septs to arrive at Dal'yth Sept, more than enough forces to crush the Damocles Crusade.
The Crusade fleet was getting encircled and its orbital control contested, allowing T'au supply lines to be established and to deploy the reinforcements to the world's surface. The Imperial forces were now outnumbered by a factor of 1:100 and increasing.
General Wendall Gauge, the commander of the Imperial Guard regiments, realised that the Crusade's chances of victory were virtually nonexistent. He had his forces secure a starport and ordered an evacuation off-world. Resistance to the evacuation order by the Space Marines and the Inquisition ended when news of Hive Fleet Behemoth reached the Crusade.
As Farsight prepared to encircle and finish off the retreating Imperial armies, orders came from the Ethereals to stand down and allow the Imperials to peacefully withdraw.
Bloodied and shaken, the T'au Empire triumphed in the final reckoning.
As Aun'Va predicted, the retreating crusaders brought word of the T'au's impressive technology and warmaking capabilities to the Imperial rulers. Rather than seeing the T'au as a minor Xenos empire to be crushed, the Imperial war strategists were made to believe that the T'au Empire was a powerful foe whose wiping out would require a massive expenditure of resources and manpower that the Imperium in its current state could not afford. And even should the Imperium commit to it, victory is not certain. The Imperium would adopt the policy of opposing T'au expansion, but for centuries, continuing to the present, the Imperium, outside of small raids and assassinations, never again attempted to invade the T'au mainland.
Aun'Va's gambit worked just as planned. For every life lost in the Damocles Crusade, thousands of future lives were secured. Aun'Va proved himself a grand and visionary statesman, albeit extremely callous in his approach to Utilitarianism. Convinced that his way is the only way forward for the Greater Good, Aun'Va would use the influence he gained in the conflict to cement his rule over the T'au Empire.
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In addition to Aun'Va's Kauyon, the Damocles Crusade provided a necessary diagnostic for the T'au Empire to identify its weaknesses:
-To address their weakness against psychic powers, the T'au tripled their recruitment and induction of psychic races and individuals into their Empire. Now the T'au Empire has access to its own psychic powers wielded by loyal subjects of the T'au'va who will advise them on esoteric matters and defend them against the unknowable power of the Warp.
-Having been outclassed by the Imperial crusade fleet, the T'au navy underwent a period of revamping and reinnovation that saw it transition from a Trader fleet into a competent warfleet.
-The T'au seized the Warp Drives from Imperial wrecks. Reverse engineering this technology led to the breakthrough that is the invention of the Slipstream module, granting the T'au access to Warp travel and FTL.
-The T'au would use the knowledge they gleaned on the Imperium to great effect in their future conquests. In particular, Farsight's Mirrorcodex would be instrumental in the most devastating defeats the Space Marines suffered at the hands of the T'au.
-The Imperium of Man played its part in making the T'au Empire stronger and wiser.
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There is one unforeseen consequence that Aun'Va did not account for. A menace more threatening than all the Imperium's legions combined. A threat that could irreparably sunder the Greater Good.
The rising star of Commander Farsight!
The resentments and suspicions between the two would be stoked into an intense enmity that would span centuries and outlast death itself.
But that's a story for another time.
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Primary sources used:
-Farsight's Codex supplement (Damocles Crusade part + the timeline entry "The Revelation of Kauyon)
-Blades of Damocles (all of it!)
-Farsight: Crisis of Faith (Chapter One, Clash of Empires)
-Farsight: Blade of Truth (Chapter 28)
-Phil Kelly's Farsight podcast (9:30 to 13:10, Galactic Kauyon)
https://www.facebook.com/WarhammerOfficial/videos/the-warhammer-community-podcast-episode-13-phil-kelly-and-commander-farsight/747057312746631/