The up-grade item in Pokémon Go doesn’t seem to serve too much of a purpose. It looks like a small data file better suited to go inside a computer than to have anything to do with Pokémon or give you an XP increase. While it does take up space in your inventory, the up-grade item is handy, at least for Pokémon: Porygon.
It’s the item you need for it to evolve into its next form. It’s essential for those participating in Porygon’s Community Day in September 2020 to make sure you have an up-grade available in your inventory. Without it, you won’t be able to evolve it into Porygon 2, thereby having it learn tri attack, its legacy move. You can still evolve Porygon using upgrade following the event, but you need to use an Elite TM to learn tri attack.
Porygon is the only Pokémon that has any use for up-grade. There could be other Pokémon that come to the game that makes use of it. However, right now, that is not the case. If you don’t plan to evolve a Porygon into Porygon 2, you can always drop the item to free up your inventory.