Much of what is mentioned here as not being possible is actually posisble if file providers support it. And app developers who work with documents need to support it too.
In-place editing is supported, for example MindNode and Pixelmator documents can be opened and edited directly without creating file copies. For that to work, bot the file provider and the app developer need to support it.
MS Office doesn’t support it unfortunately. The functionality for in-place editing has been present already since the iCloud Drive app was released, but only few developers took it on to implement. I hope the Files app will pursuade them to change that.
The Share sheet will display Open in instead of Copy to if in-place editing is supported.