Upgrading Knack in Knack 2.
In Knack 2, you upgrade Knack by finding 100 Treasure Chests, that give you a Relic or Crystal Part, which can be used to make Knack stronger. These are actually optional- but they give you so many abilities that you are encouraged to hunt them down- their contents are randomized, but their location never changes, so you are encouraged to farm them if you have to until you get what you want.
That apart, to upgrade Knack, you need to find enough Relic energy to fill one meter- you will have to first unlock the Way of Speed skills before you are allowed to move on to other branches. Way of Speed will be unlocked automatically while playing the game.
There is one last way of upgrading skills in Knack 2– as you are playing the game, you my see several non-aggressive creatures (mostly ladybugs). These guys are harmless- but attack them anyway, because they contain a bit of Relic energy- which can be useful for upgrading too.