Here's how I think it should work:
Upgrade:
A Mk1 => Mk 2 requires 5xMk1 to get a single Mk2.
A Mk2 => Mk3 requires 5xMk2 to get a single Mk3, etc.
If you want to trade to a completely different kind of gear, you can only trade grey for grey, green for green, etc. It requires 5 grey gear to get 1 different grey gear. It requires 5 purple gear to get one different purple gear.
I've noticed that some purple gear is not equal to other purple gear. For those pieces, like Raid gear, you can only trade Raid Purple for Raid Purple (or Advanced Purple for Advanced Purple), and it still costs 5 salvage of one type to get 1 salvage of another type.
So if you want to trade Grey gear for purple? 125 grey gear => 25 green gear => 5 blue salvage => 1 purple salvage.
If you want grey gear of one type (a grey Armor Mod to become a purple Holo Projector):
625 grey Armor Mod => 125 green Armor Mod => 25 Blue Armor Mod => 5 Purple Armor Mod => 1 Purple Holo Projector.
yes, it's a TON of grey gear to get what you need, but I'm actually sitting on a lot of blue gear, and being able to go from a couple hundred Blue Armor Mods => 40 Purple Armor Mods => 8 Purple Holo projectors or 8 Weapon Mods would help me more than leaving those Blue salvage sitting around.
I don't think this would change the game. it would still be a lot more efficient to spend 8 energy farming a Purple Holo Projector than 6 energy farming grey or green or blue gear in hopes of trading up. Also, as I think I've shown, it wouldn't grant you a million new purple gear right away. At best you could get 50-100 of the purple gear that you need for all those things you have way too many of.
Me? I'd trade a bunch of grey for Mk 3 Blastech Weapon Mods, I always seem to be lacking those. I'd also trade a bunch of grey for Grey Fusion Furnaces (Mk1 CEC Furnace) and Mk1 Armor Mods - I never seem to have enough of either of those.
Some of the green might go to more Blastech Weapon Mods, but some might go to Blue Comlinks (and maybe even purple com links, I don't have enough of either blue or purple com links). You can definitely use it to give yourself a bump. It would make it a lot easier for high-level players to get a new toon from Gear1 to Gear7, but it wouldn't help much with raid gear.
Anyway, it would help you get your new toons to barely-usable bt it wouldn't get rid of gear farming requirements and it DEFINITELY wouldn't be cheaper than farming the gear you need directly.
I think this is the kind of system that the devs could implement that would make certain aspects of the game less tedious without changing the game.