1) Hardware degradation is not for you to worry about as a user. That's for DigitalOcean (or any other cloud provider) to worry about. You specifically pay them so you don't have to worry about hardware issues.
2) I have serious doubts that a rarely-used small 512MB swap file is going to degrade hardware and lead to performance issues for either your VM or your neighbors. Even if it did, see point #1 above.
> Doing so can impact the reliability of the underlying hardware for you and your neighbors
This sounds like they're concerned about thrashing disk I/O... to which I'd say it sounds like they've under-spec'd/over-sold the host server if one VM swapping can degrade performance for all guests. Do they not have upper-bounded I/O quotas or I/O balancing? Can a single VM doing heavy disk I/O that is not Swap cause the same performance degradation? It seems so...
> If you need to improve the performance of your server on DigitalOcean
No, having Swap is not about improving performance, it's about keeping your system up and running in the rare event it exceeds the allocated RAM. Kernel Panics are not fun, and it's generally better to run with reduced-performance than not to run at all - at least until the Admin has time to make the appropriate changes to either rein-in the runaway RAM usage, or upgrade to more RAM.
> we recommend upgrading your Droplet
They would recommend that, wouldn't they...