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Since Demon Armor turns the wearer’s unarmed strikes into magic weapons can a Paladin smite with their unarmed strikes while wearing it?

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Yes, they can

Normally, Divine Smite can not be used with unarmed strikes, in spite of unarmed strikes counting as melee weapon attacks, because the hands do not count as weapons (in spite of them being listed in the weapon table). There is explicit ruling on this from Sage Advice compendium

Can a paladin use Divine Smite when they hit using an unarmed strike? No. Divine Smite isn’t intended to work with unarmed strikes. Divine Smite does work with a melee weapon attack, and an unarmed strike can be used to make such an attack. But the text of Divine Smite also refers to the “weapon’s damage,” and an unarmed strike isn’t a weapon.

Demon Armor says

The armor's clawed gauntlets turn unarmed strikes with your hands into magic weapons that deal slashing damage

So, with this armor, your hands now are weapons, and because they are weapons, Divine Smite's damage can be applied to them.

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  • \$\begingroup\$ PS. Demon Armor is cursed so it cannot be taken off. Luckily, there is not even a penalty for sleeping in armor in 5e. \$\endgroup\$ Commented May 2, 2022 at 5:22
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    \$\begingroup\$ Xanathar's adds a penalty, though like basically everything else in Xanathar's it's optional. That said, most of those optional rules make a lot of sense (I can't get a good night's sleep in jeans; imagine trying to sleep in full plate), and I'd expect a lot of DMs to adopt them if people were doing silly/abusive stuff like this all the time. \$\endgroup\$ Commented May 28, 2022 at 3:42

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