Holes

When a large object hits a ship, such as a Cannon Ball or an enemy Ship, this will create a Hole which allows water to enter the ship; if not repaired, the ship will eventually fill with water and sink.

Holes can be found by switching to the Repair Hammer (pressing 5 or using scroll wheel), which will highlight holes in bright red. Walking up to the hole and hitting it with the Hammer (hold down M1) will fix the Hole within five seconds.

Water entering the ship can also be slowed down with Pumps, but holes let water in faster than it can be pumped out, so only repairing Holes will stop your ship from sinking.

A cannon ball will create a single hole where it hits a ship, while being rammed by a small enemy ship creates 4 holes instantly, and being rammed by a large ship creates 6 holes.

According to community testing, Holes will sink a Galleon in the following times:

Source: Reddit user Olakola

All player-held weapons, including grenades and cutlasses, will not do damage to ships, and thus cannot create Holes.