I don't think it will be possible to have more than 4 players. 20 would almost certainly be extremely laggy. I also think you would need a huge number of matchframes to give time for a fight between 20 people to be fully resolved. However, I'm sure a 4-player mod where you have to pick up weapons would be possible, and could even work quite well.

I like your other idea of transforming weapons. It would work well for gun mods, and it would allow you to create lightsabers and hidden blades.