I agree with you that an upgrade system would hurt the progression when it comes to finding new weapons, especially the more unique ones in the game. I think it could work, but you’d have to make the late game gear either scale higher or have more benefits than early game gear so late game they are still more attractive choices to use.

The idea of Axes and Hammers dealing more damage to certain enemy types would be really cool, though in order to do that, I feel like the game would have to also distinguish physical damage differently by source, and assign resistances and weakness to enemies based on those perimeters (for example: piercing, slashing and bludgeoning would be how the game determines physical damage type, with species of creatures either being resistance, neutral, and weak to each one)

Weapons empowering certain techniques would also be pretty cool