Infatuated with Bitcoin's ingenious, elegant design.
Love the lessons I've been learning about trading, trust, and community.
Brainstorming some possible ways to contribute; thinking of an escrow service that slowly trickles BTC at a set rate from one account to another, to spread out risk in a low-trust ongoing-service relationship (let me know if that sounds interesting to you).

I like the approach you're describing, except my understanding of Paypal is that the risk of chargebacks would make this too risky for the seller (bitcoinmarket.com cut off PPUSD due to chargeback fraud, from what I hear -- a friend of mine was burned).

Also, to prevent the market from being flooded with unbacked buy orders, we would need a trusted escrow that could guarantee that sufficient USD to carry out the order is being held in reserve for each outstanding buy order in the network (otherwise we wouldn't have an accurate metric of market depth).

Distributed trade escrowing seems like something that could be addressed using the existing Bitcoin Script mechanisms:
https://en.bitcoin.it/wiki/Script
in conjunction with public API's from payment services that do not allow chargebacks (e.g. Dwolla, as I understand it).

When the network has matched up a buyer and seller for a trade, the seller's client initiates a BTC transfer using a script that only allows them to be unlocked upon receipt of verification of a USD transfer from the buyer's Dwolla account to the seller's Dwolla account (the transfer would include a special "comment" containing a hash code identifying it as corresponding to the current transaction).  The "timeout" mechanisms could be used to send the BTC back to the seller if the Dwolla transaction was not verified within some time window.