That stone on which u clicked can be upgraded ONLY for glowes/axes/dagger, but only if you have that stat on your weapon + you need the "step 1" stone before you can use the selected one because its "step 2"
http://forums.playredfox.com/index.php?threads/loyalty-system.47/ Press L to bring up the Living window, click on the loyalty tab and look at the blacksmith, you will get a list of items you can donate when you click on the "Donate Loyalty" on the NPC you're looking at. Most of them will be [new] weapons that only come through mob drops. You have to progress through the steps. You cannot start on Step 4 for example, you start on step 1 and progress. I did a couple of donations and I was only given 2 donation points per [new] weapon donation.