Ds1 would be a better game if hollowing cost some of your hp. As it is, there's really not many reasons to use your humanities. Reversing hollowing basically boils down to opting into multiplayer.
The penalty for death is the loss of your souls and the soft reset of your progress through a given level.
Hollowing—essentially, a more persistent state that follows you until reversed—isn't supposed to be all bad, not a pure punishment, just as death isn't all bad (because you learned something, hopefully). Bad things about hollowing: Your character is ugly (as you know, this matters to some people), you can't kindle bonfires, you can't summon help for boss fights, and you can't place your sign to assist with boss fights, either. The latter three restrictions all tend to encourage reversal of hollowing when approaching the vicinity of a boss door.
In DS2, hollowing is all bad, and that's retarded... yet unlike DS1, PvP in DS2 can be avoided almost entirely by burning effigies on a regular basis, which can farmed by the dozens from a few areas by midgame. This while fully human and online.
I absolutely, 100% agree with you that the ability to opt out of PvP so thoroughly (in most areas) while being hollowed in DS1 is a little too much. However, people can also just play offline, read a guide for the location of secret treasures, and surface online only for co-op, or not at all. Because of this, your ability to MAKE people participate in PvP is substantially limited.
What the mechanic really needed was a middle ground. It could have been as simple as making the "PvP immunity" ablative over time. That is, for the first 15 minutes of being hollowed, you are immune from invasion; from 16-30 minutes, you are low on the matchmaking priority list; and after an hour, you're fully back to being totally "visible" to invaders. One could even go so far as to make "long-term" hollows MORE visible to invaders after two hours.
As you can see, there were other options. If I had to choose a dumb option, I would take a penalty to souls gained from slain enemies (up to -25%) over a penalty to health, because at least then the player's next journey through the level will be on an even footing, and weakened targets won't be served to already twinked-out PvPers.
