It's certainly a better idea than Tether's false accounting, but I'd rather have my dollars undercollateralized by a bank backed by reserve lending and depositor protection schemes than overcollateralized by much riskier assets like ETH.
I'm also struggling to understand the incentive for people to overcollateralize to receive tokens notionally equivalent to dollars and how that's convenient
There are financial incentives to create and destroy DAI. A user of DAI doesn't need to collateralize, he just buys DAI.
DAI demand will grow, if the use cases grow. It is also a good safe heaven for crypto traders.
To your second point, the collateralized loan allows for very very low interest margin investing. You can use the DAI to invest in something, sell it at a higher price, repay your loan, and make money on the difference.