Like others, I find that the main problem is that with many of these out, then you do wayyyy too much damage.
Either make it not stack, or I would reduce both retaliations to 1 damage, and make it stoppable by shields. I know that's against what you are after but that's the best way I can think of to balance it.
For the upgrade you could either increase damage dealt or decrease cost to play.
*sigh* I am reexplaining this for like the 3rd time.... and from your questions, I imply you have not read the earlier posts, no?
I already made Retaliation blockable by shields. Also, each 2 | 3 damage from ANY Retaliation is a seperate damage instance, rather than a giant piledrive or stack of damage, so a decent shield would completley shut this down. Damage from Temporia's retaliation also triggers shield effects, so Permafrost Shield, Procastination, and Gravity Shield will stop animated versions dead cold, and Wings, Boneyard, and Phase Shield would make it do zero damage. And yes, the upgrade is a 1 damage bonus to each Retialiation instance damage, which can be STILL completley stopped by Hope, Titanium Shield, etc. Or you could just out-damage the opponent.
Let me provide an example.
I am playing Emeraldtiger. Tiger has 4 RoL's on the field and I have an unupped Temporia. He ends his turn and Temporia deals 2 damage for 1 RoL attacking, then does 2 more damage for the next RoL aattack, then 2 more for for the next RoL attack, then 2 last damage for the last RoL attack.(think Adrenaline).
I animate my unupped Temporia and played an upped Temporia.
ET's turn. He plays Hope. and ends his turn. Now each Temporia would deal sseperate damage for each attack in this case, so if one RoL attacked, one Temporia would deal 2 damage and then the other would deal three. However, since ET's Hope blocks 4 damage each time, each instance of 2 or 3 damage would not get through.