This is overall a really neat idea. To be honest, I don’t fully understand how the mechanism you’re proposing works. I’d need to see a more visual example I do like the idea of ‘burning’ wearables, however. Anything and everything that destroys stock and increases rarity is, to me, a good thing.
An idea I have on this topic:
It would be cool to have it where you can distill down three items of the same rarity and from it get a gem that imbues a wearable with +/- 1. The gem rarity would only apply to wearables of the same rarity. The gem’s trait would be randomised from the pool of stats of the items destroyed.
Ie: you distill three common items. One is +1 BRN, one is -1 SPK, and another +1 NRG. The resulting gem would be one of those three, in this case, +1 BRN.
That gem could then be imbued into another common item. Imbuing an item is permanent.
Mechanisms like these would need to be balanced to prevent power creep but also to be worth it enough for hardcore players to burn mythical and godlike items.