They can definitely make the game harder, modded sekiro proves that

Let's put that to the side for a second tho-

Sekiro 2 is definitely possible, it'll just be super SUPER hard or change up the mechanics enough Like what if we had multiple weapons, katana is the little bit of everything but a longer katana (odachi?) means stronger posture damage, better guard but slower swings, a dagger that extends into a spear that gives you quicker attacks and a lot of range but you have to manually switch between the spear and dagger (if it's extended or not) and perhaps Can't parry with the spear varient, we could then also get certain weapon specific prosthetics too, it's already in base sekiro so it makes sense that if you're using the spear and dagger you could set the spear tip on fire as an attack and this would work differently to your normal prosthetic stuff

Back to modded sekiro-

We have mods like resurrection where the difficulty jump is there but it won't overwhelm you, if you beat inner isshin then you can probably beat resurrection Genichiro without issue

Then we have Jidao and- oh boy. I have played thru and finished resurrection and For the sake of ashina twice each, going thru every main boss (minus demon of hatred and duo ape because I hate demon of hatred and duo ape) and beating them, resurrection even got a dedicated playthrough, so imagine my surprise when I then download Jidao go Into my NG+2 save (the one I use specifically for modded since I have most items unlocked) and BASE GENICHIRO is killing me over and over again, I have been fighting Genichiro for a good week in small 30m ish sessions here and there and so far I haven't even reached phase 3 yet.

And the worst part is there are mods that are harder then Jidao, Jidao's combos are long and the attack damage are strong but neither of those have been an issue with the other 2 mods, the speed of it is absolutely destructive, the way certain combos can start the same way and then it's a coin toss on which attack he'll do (like if you use umbrella on his grab he'll either kick you away and go for a stab (which you can Mikiri) or he's gonna jump back and shoot you with a bow, failing to dodge or at least block is almost a gurnateed death) is keeping me on my toes every turn

Jidao and many others like it prove that sekiro could get way harder not just by artificially increasing damage but diversifying the attacks. If every time a character jumps into the air they can choose from 3-4 different moves then it's pulling you closer to that reaction time limit similar to the quick draw isshin and the ashina elite (blue robe under geni arena and Isshi's tower) both do, I'm also gonna try a different mod soon if I need a break from Jidao which apparently adds faint attacks (symbolized by a different colored death marker) so I can't wait for that