The blacksmith would take you're troops wepons (of you're choice) and upgrade the wepons, it would have the upgrading cost of 100 gold coins, making it more powerful than the last upgrade, it would increase damage and sometimes have special effects, it would go up 300 coins each upgrade and the maximum upgrade is level 10, it would have 10 seconds each time, all it would do is upgrade wepons of your troops, not the actual troop. The damage would increase by 20% each time upgraded. This would not apply to giants or any troop with no actual wepon. And it would cost 1,000 elixir to build.
The only way I could see this working with those prices is if you were to upgrade the troops in the army camps weapons only and not permanently. For example, if I had an army camp of 200 barbarians, I would upgrade all of their weapons individually, costing 60 thousand gold total, and only lasting that one battle. The upgrades would have to take time, 5 minutes maybe, and they would have to be in increments of around 10%.