What you put in
Two copies of the same mod, same quality, plus the materials listed for that step. Costs live in upgrades.txt on each player's copy of the mod.
Two mods, one step up
Server and every player
An Upgrade Bench, crafted at a workbench. Put two of the same weapon, armor, tool, or vehicle mod in it, at the same quality, plus the materials in upgrades.txt.
Both mods and the materials are used. One mod comes back one quality level higher, up to Q6. The upgraded mod keeps its mod slots.

Two copies of the same mod, same quality, plus the materials listed for that step. Costs live in upgrades.txt on each player's copy of the mod.
The block and recipe have to be on the server. Clients receive them. The upgrade itself runs on each player's PC, so every player installs the mod too.