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  1. http://www.narutoforums.com/showthread.php?t=958143
  2. Damage dealt with Iro Oni is dependent on the color you call. Shunsui makes it clear here and here. For example, Stark first only got a small cut in his arm due to Irooni mitigating the damage. Had it not been for that, Stark's arm would have been gone apparently. Hence why Stark felt like it was. Now, since Shunsui only called Grey, despite that attack being capable of tearing Stark's arm off, it only did minimal damage to Stark because of the color called--which is a color that Shunsui didn't even have on him, though Stark still had gray in his arm so it still did some minimal damage.

    Further, it is true that you need to call out a color to cut when it is your turn during the game;however, when you call out a color,it is still possible for your opponent to attack back and cut you in the color that you've called out, hence why Shunsui notes that the higher the risk is to yourself when calling out a color, the higher the damage you will deal.

    And here are even better translations of chapter 374, just to make it even clearer.

    Cnet's translation-

    Shunsui: "In "Irooni", it's entirely possible for the opponent to strike back at you, as long as it's on the colour you chose. / And what's more... // The greater the risk you take upon yourself, the greater the damage your successful strikes deal to the opponent. //" http://mangahelpers.com/t/cnet128/releases/16217

    And Ju-Ni's scanlation-

    Shunsui: "With Iro oni, if your opponent cuts you on the color you call out, you'll take damage. Also the higher the risk the color is to you, the greater the injuries you'll inflict." http://www.[Blocked Domain]/94-32543-17/bleach/chapter-374.html

    Additionally, it also appears that the participants of irooni can exchange many blows on a single color being called and can clearly block attacks from one another; that is what's shown after Stark called white to hit Shunsui until Shunsui decided to remove his white haori and call Black on his turn.