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The bypass is to keep the coolant circulating to prevent steam pockets from forming in the heads while the thermostat is closed. If the water flow is stopped (no bypass hose, and a thermostat with out holes drilled in it) then you have a formula for getting localized steam pockets in the head. The problem with holes in the thermostat is the delay in the engine warming up. Another help in preventing steam pockets is running higher pressure radiator caps. On our billet surge tanks we are running 20 PSI caps. F1 cars for a while (until it was banned) were running closed systems... On stock surge tanks you can only run about 13 PSI with out the tank ballooning. Another issue with steam pockets is that because steam dos not carry away the heat, as well as water, you also get hot spots in the combustion chamber... This can also lead to detonation...
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