The answer to your question Broscar and Queadah is – ‘elegantly’
and frankly dudes, I don’t think the game should release without it…
I’m sure that your main concern relates to balance, ‘how does a lvl1 compete with a lvl10’
There are a few things that I think mitigate this concern;
Firstly in multiplayer races/battles the player has two available weapon slots only. Regardless of the strength or breadth of your firepower, at any one time, you can only hold two weapons. Further, you need to collect a power up to hold or carry weapons. So naturally, the game applies a level of balancing, as weapon turnover during the race is effectively the same between lvl1 and lvl10. It's not attached to a cool down or some other mechanic.
Secondly, sure the lvl10 might have a bigger potential loadout with weapons that are broadly more capable and featured but lvl1’s are already holding 80% of that power. By this I mean that upgrading and progression is intended to account for only that final 20% gap in weapon power and function (as I see it). So your starting load out of 4 to 6 weapons will still be very capable. The upgrade component applies nuance, cosmetic options, relatively small and incremental increases in power/durability/speed and personality i.e. the mod system.
Thirdly, at the outset, there is a not only a 'feature-set-deficit' (I see this as a somewhat superficial or percieved gap, I know it’s actual, but anyway…) there is also a 'player-skill-deficit' (to me this is real, unavoidable and arguably, more important). By this I mean that regardless, a noob getting into the ring with a pro is going to get owned. And regardless of the full feature set available, a noob is going to need to learn how to use that feature set and ultimately they are going to need to learn in incremental stages (speed of learning is going to be different from player to player but we all have to go through it). And I don’t say this in reference to the weapons only but everything, so, stage 1 - press x to accelerate and r1 to fire weapon – stage 2, breaking and drifting – stage 3 track layout… stage 'x' vehicle handling, weapons, jump and in amongst it all, ‘holy crap this game is really fast,’ and ‘sh%$!, I’m driving on the ceiling!’) and so on...
The risk, and dudes, I’m really concerned about this, is when everything is available at the outset players are going to be overwhelmed. Say you plan to have 10 weapons, with 3 stacked versions – realistically, you’re asking your player base to instantly be familiar with 30 weapon types. Opportunities for learning also become few and far between as they will be collecting individual weapons less frequently (i.e. a 1 out of 30 chance as opposed to 1 out of 4/6 chance). Additionally, stacking means that the weapon I’m holding becomes drastically different in an instant further complicating things…
*A quick note - By being part of this early access, all of us have had the ability to learn in very, very incremental stages – to us, we seek out knowledge regarding new content and features, test them exhaustively; to us new features stick out. Your audience is going to be hit with it all at once.*
So back to my point, weapon upgrading lends itself to this learning/teaching and Caged can use this to educate the player. You know like, ‘I have 6 weapons available in my loadout at the outset, but realistically 6 is all I need at a base lvl; all I understand and will use effectively. This still represents an effective arsenal and one that I know is going to build and grow as my knowledge and skill builds and grows.'
Fourthly – one weapons upgrade path is the counter to another weapons upgrade path i.e. the forward facing shield is countered by the leader missile turning back on the leader or a double mine drop counters forward facing shield.
Fifthly - unlocking stuff is addictive and gratifying
Sixthly – Depth! …and Deathmatch particularly needs depth. It needs player customisation and personality (my arguments above are possibly 10x as important in this mode).
Sure everything comes down to implementation but I think your chances of overwhelming and frustrating players is significantly higher with a stacking system as opposed to a levelling system.