Tool Upgrade I is a one-level inspiration: make 5 first-tier tools or pieces of equipment, then buy it for 5 Faith. It is a Smithing inspiration and appears once you research Bronze Forge. Buying it reveals Tool Upgrade II.
Totals are counted from the start, not per level. Buying a level costs Faith from your backpack and gives talent experience;
see Talents and Inspirations.
Notes
The tools are worth it on their own. A bronze tool gives +2 mastery in its branch instead of the rusty tool’s +1, and mastery counts for every tool on your toolbar, so the old one can stay there too.