Today I tried the upgrade gear (weapon, armor, items) at the Blacksmith playing Minecraft Dungeons Creeping Winter DLC.
The Blacksmith now instead of buying random items, it is used for upgrading item’s power to a higher level.
You need to put the item in the slots (3 slots available). You can’t use equipped items, so make sure you unequip and item in order to give it to the Blacksmith.
Next, you need to complete 3 missions in order to finish the upgrade process. Keep in mind that doing harder difficulty missions will ensure higher power gear, based on my understanding.
After you finish the 3 missions, you’ll see an exclamation mark above the Blacksmith’s head. This means that the 3 missions have been completed and the upgrade items are ready.

Upgrading weapons and armor will give you the enchantment points back and reset the enchantments. It won’t however re-roll the enchantments (give you other random enchantments), it just removes the chosen enchantments and gives you the enchantment points back.
I wish they show the power of the items before it was upgraded as well, something I hope will be added.

That’s it for this video. If you have anything new about this upgrade system, let me know in the comment section below.