I dont think Gems should be used in armor. If you have so many extra, then activate them, stop hoarding them. They are cheap to use or combine as well.
In my opinion there needs to be a few new levels of gear, and there are a few options to achieve this.
First. The next step of armor should be a currency separate from any other current items in the game. This could something similar to ash, or another mechanism players work to earn / achieve by turning in old currencies (ash, gold, gems, UT's, DE's, palace essences, etc)
The second part of that there should be a quest item specific to each slot that has a quest around upgrading it. An example below
Player slays a new strong beast, they get a "broken hilt"
That broken hilt, is then upgraded to a to a 'semi useable tier', something similar in strength to crystal / shadow. But cost either the new currency, or requres a quest which requres a good investment of time.
The 'Broken Hilt' item can be traded to other players, but once they quest item has been upgraded it is locked to the player on the quest.
Now, the second upgrade of the item, Would be another quest, which makes the item class specific, or utility based to suit the players needs / wants.
Items could be in 2 classes.
Royal (kingdom focused) - Provides income generation, reduced corruption, increased war bonuses.
Duelist (Dueling based) - Provides increased stats for dueling, higher defense, void resistance, etc
These items would be stronger than shadow in terms of 'item level' but may have stats which are lower based on the specific class. The second upgrade teir may be pay locked, quest locked, and should use the new currency as an advancement currency.
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