Holding your colors

Allegiance is about what you represent. Hold a dye in either hand and the matching faction treats you as a friend:

Red dye or pink dye makes the Red faction friendly.
Blue, light blue, or cyan dye makes the Blue faction friendly.
Any shade counts, so baby blue is still blue.
Hold a red and a blue at the same time and both sides turn on you.

Outside an active battlefield the factions leave players alone. It's inside a warzone that your colors decide whether you walk safe or get swarmed. Your reputation can override this entirely (see below).

Reputation and trading

You have to pick a side, and the way you pick it is with a blade. Killing a faction's soldiers earns you standing with their enemy and burns your standing with them. Leaders and quartermasters are worth the most, and killing medics is remembered bitterly.

Standing climbs through ranks: Outsider, Ally, Trusted, Honored. Each faction has a Quartermaster who acts as their supply officer:

Reach Ally and he opens a real trade screen: bread, arrows, and the faction's War Horn, which gets cheaper as your rank rises.
Reach Trusted and he adds iron swords and golden apples.
Sneak-click him any time to hear exactly where you stand with both armies.

Push a faction low enough and they hate you forever, colors be damned. Earn enough and they recognize you on sight, safe even in the middle of a battle. The War Horn is a one-time use item that summons a squad of three soldiers and three archers to fight at your side.

How they spawn

War erupts on its own. Periodically, two camps pitch near you, one Red and one Blue, set apart so their armies march to meet. Each camp lays a campfire ringed with trampled dirt paths and garrisoned soldiers, archers, a medic, a quartermaster, and a leader. The battle escalates with reinforcements until one side is wiped out. Kill a camp's leader and that camp goes dark, its fire burns out and it stops sending reinforcements, so cutting off the head is how you end a war. Lone knights also wander the wild between battles.

Hedgeknights vs. faction knights

The faction knights (Red and Blue) are the war: they answer to leaders, fight each other without end, hold grudges, care about your colors, and run the whole reputation and trade economy.

The Hedgeknights are something older and apart. They fly no banner and take no side. They are neutral to Red, Blue, and players alike, and the only thing they truly hate is monsters, which they hunt on sight. They have no leaders, just wandering knights at their own camps. They hold no grudges and do not care which color you represent. Their quartermaster trades with anyone, no reputation required, coin is coin.

Warring Factions