HAVE UPGRADES FOR SHIPS

sounds cool, but that would only work in a survival rpg type world like Rust, DayZ and Minecraft where any progress you have done will persist in the world.

Unfortunately, Sea of Thieves doesn't work that way, players are not stuck into one server, they can go across many different servers and all their ingame progress other than cosmetics are reset once they leave the game.

First explain how.
What system would you put in or way to unlock and attach said upgrades.
Are they perm? Cost? Balanced?

That would make longer time players have more advantages, and it would also make asymmetric gameplay. The point of SoTs design is that all players have access to the same tools. The gameplay as it is right now is balanced around this and would have to be massively rebalanced to accommodate for any level of customization.

permanent upgrades with no downsides go against the core design philosophy of Sea of thieves.

But I think there is a possibility in “augments.” Major "upgrades" that also bring a major downgrade. For example, adding an extra cannon that acts like a cannon of rage, exploding if it takes too much damage or overheats. Or a mast you can lower on demand to better hide your sloop, but other pirates could lower it too. These “augments” would be highly situational, sometimes benefiting you, but other times being a drawback. if balanced correctly I could imagine something like this being added to the game.