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A material is what the Source engine uses to define which textures (.vtf) and shaders (function which defines how materials are rendered to the screen) are used on a surface (models, world surfaces, sprites, etc). This information is stored in a Valve Material (.vmt) file.
For a quick overlook on the entire process of creating a material from scratch, see Material Creation.
For a more lengthy tutorial on this process, see Creating a Material.
See also
- Shader Types and Parameters
 - Half-Life 2 Shader Fallbacks
 - Normal Maps
 - Reflective Materials
 - Parallax mapping
 - Third Party Tools