At first, drawn a exp bar. You can call it... juvenile bar or something. Should be green. =)
This bar should go from +1 to +10.
This bar can work with stones, or maybe you can make it work with regular dropped itens.
Every red/blue stone should add 10 exp to the item, purples and greens 100 exp.
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A regular dropped equip would give 0,1exp.
Now the possibilities are infinite if the bar is complete. You can make like the actual system, just upgrading +1 lvl to the item, but... I think would be cool if the player has the opportunity to choose a personal stat... this could be luck based. I mean, if he wants, he can try getting 1 dexterity in his glove, with luck chances.
Exp bar completion = +1 lvl & some chance of gaining a bonus stat.
Adding a bonus stat or not will depend on the luck, he can get like 1-5 dex on his gloves with 20% chance per completed bar or something. I mean, those are just some ideas, feel free to adapt in your way if you want.
If that fails, the player won't get the bonus stat, but the item will still lvl up. And here comes a nice part: The valorization of Gray Stones.
However, gray stones will also took a random bonus stats if they're used. If the item doesn't have bonus statuses, so whatever, just downgrade.
After +10, the bar will be changed by some other thing. You can make lots of things like the upgraded equipment evolving into something nice.
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+10 - +15 (or more) bar:
That can be called... I don't know. Z exp bar? Dragon bar? Should be purple. =) or Maybe orange. =)
This bar should be fed with LOTS of something rare like... well, only purple/green stones, or just create a new beautiful item. Each time the bar is completed, there are another "infinite possibilities" that can be added. I'll suggest increasing the bonus statuses by 20% per level. The player could choose if he wants phy or energy def too. Or maybe he can have a minor chance to get new completely different: Z-Stats, like "increase dodge rate by 20% while dashing", "Little chance of poisoning/burning the enemy per attack", "Increase buff duration by x" etc.
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(White stones? They can increase the chance of getting bonus statuses).
Like I said, doesn't needs to be exactly like this. Those ideas can be adapted into something you think would be better.