"Clothes make the man. Naked people have little or no influence on society." - Mark Twain
Every MMO I have played involves getting armor, rings, trinkets, etc and using them. Even EVE Online, at some level, is about getting equipment with certain attributes and using them.
1) Where it comes from.
In World of Warcraft, most of the best gear comes from one of three places. PvP, raiding, and crafting. Other games have variations on this, but it's basically the same concept. But, I won't deny that my biggest gripes about how gear is handled are based on how WoW does it.
Random drops from boss encounters while raiding have got to go. Besides being frustrating, it means that getting a specific piece of equipment requires you to do some pretty crummy things. Do you really want to entice people to run into a dungeon or raid instance over and over just in the hopes of getting some good gear? That's not even a viable model for an adventuring hero to outfit themselves. Should it take nine or twenty four other people for a player to get a nice piece of armor? I don't think so. And then there is the player competition this creates. When there is only one and many people want it, they often will fight with their own guild mates for it. Guilds fabricate entire systems outside the game to manage this loot distribution system. That's asinine!
I like the idea of collecting badges or tokens from killed enemies to trade in for armor and equipment. That's an awesome idea. I don't mind people playing PvP to amass points so they can do the same. Again, great idea. But the random loot drop idea is just creating more effort and work for everyone.
2) How it looks (stats/aesthetics) when you first get it.
Armor often comes in a lot of flavors. Many of the standard fantasy tropes apply to MMO games. Priests wear cloth, rogues wear leather, warrior wear plate, and so on. And, in every game, different types of characters share similar armor types. In WoW, for example, shaman and hunters both wear mail armor, and paladins and warriors wear plate armor. And when the gear comes with magical properties on it, it creates arguments and confusion over which item is best used by different classes. And add into the mix that paladins can be healers, tanks, and dps, so you end up with all three kinds of plate. Some of which is useless to others. This means that itemization of gear is incredibly complicated for the developer and for the player. Again, we see there are lots of systems and web sites dedicated to helping people wade through the tons of equipment to find what is best for them. I say that's broken.
So, let's take the magical component of the armor, and toss it down into section three below and just talk about armor and equipment and what it should be. Armor should be armor, and nothing more. It should protect you from physical damage (armor value), an armor type (plate, cloth, etc.), and a visual appearance. It needs nothing else. This makes picking your armor very simple and lets you prioritize appearance higher without sacrificing some innate boost to your specific class capability.
Net result? Your armor is selected based on protection and appearance.
3) How it can be made better.
Now that I ripped all the juicy stuff that people long for in their gear, what ever will we do? Apply the benefits, stats, and buffs to the gear based on what class we are and what role we are. Just like my crafting post before this, the land should have some enchanters of varying levels of skill who can sell to adventurers enchantments. These are scrolls that let people apply benefits to their armor to suit their class and role demands. One side effect is that your armor is not upgraded by replacement, but by actually replacing only the enchantment. Your look and armor values can stay the same, but you can increase your power with access to new enchantments via the vendors. These could also be purchased and stored so you can hang on to ones you like.
You might say that we've just moved the problem around, but that doesn't have to be true. There's a chance that these enchantments could become insanely numerous and complicated. But if there is a mathematical system that underlies the entire class system to help quantify the net effect of every stats on characters theoretical performance, then a formula can exist to create similarly powered enchants and balance them properly. Keeping the number of enchants small is now a viable option and new armor designs don't force the creation of a new set of stats for the gear. There's no reason to create enchants for variation, only for power increases and class/role customization.
4) How does it get replaced?
Your armor is replaced if you find or purchase armor with more protection, or a better look that you like.
Your enchantments are replaced if you find or purcahse an enchatment that is better. Or, if you change your role and need enchants that cater differently to that role.