If we are exchanging 1 BTC for $650 and we lock up 1 BTC or less as a collateral, then I can receive your $650 and let my 1 BTC stuck as a collateral forever. I'm not losing anything (I'd pay 1 BTC anyway), but you lose 1 BTC + $650.
No that is not right. If you unlock you get your collateral back (0.1BTC in my example, 1BTC in yours). If you dont unlock then you lose that.
Collateral should be greater than amount in exchange. If they exchange $1000 for 1 BTC, collateral should be 2 BTC. So when Bob receives $1000 it's cheaper for him to unlock collateral (2 BTC) than to keep 1 BTC worth of product (cash in this case).
The collateral only serves as incentive to not hurt the other losing his money. There is no way to steal the others money. Even a small collateral like 10% can fulfill that job. If you behave unfair you will lose 0.1 BTC as well, even if the other will lose 1.1 BTC for rational persons it is not an incentive to lose anything if he only needs to click a button.
The height of the collateral can be freely chosen, but there will be probabyl a recommended value.
I will consider to set the default collateral higher maybe 50% or 100% of the trade volume.