To get to the root of what makes partial or full loot in PVP exciting and all around a bonus to the PVP experience is to first look at gambling. What makes gambling addicting? Ask any gambler what the exciting aspect of the games they play are, it's the risk factor. You're risking something to get something. You might be risking a little to gain a little, a little to gain a lot, or everything to garner an immense gain. This is what gets people's adrenaline pumping even in something as simple as a game of cards. The same can be said for PVP, as it's essentially a gamble, is he gonna beat me or am I gonna beat him. If you aren't fighting to protect your items or take his, there is no rush in the fight cause it's for nothing except bragging rights.
Of course if you're going to lose items in PVP, they can't be overly valuable or things that make or break your character and require hours to grind for such as in games like Everquest or World of Warcraft. They should be player crafted for the most part and relatively easy to acquire. They should only modify your damage through a small percentage boost or through special effects like elemental damage or status effects such as slowing the target or inflicting a Damage Over Time status like Poison, not be the pure source of damage dealing. Because they are relatively easy to acquire and not the things that make or break you, death is merely a minor inconvenience if you planned ahead for it. You can stop at the bank and take out a new set of items, or you can withdraw some money to buy a cheap storebought set. Death will set you back some, but not be a character killing blow like if full loot was introduced into World of Warcraft.
How do you make PVP rely on the player's skill and not on his class, items, or levels? First you eliminate class and levels in one swoop by using an Ultima Online style skill system where you advance your level of skill in a skill by using it. Swing a sword at a monster/player to raise your sword skill, cast magical spells to raise magery, etc. To eliminate the reliance on items you make them not the major factor in the strength of your character as laid out previously in this article.
The key to making the game rely on the player's skill after setting the framework of character development as such is to use a collision detection system and make the combat twitch based. This means giving the player the ability to manually dodge attacks directed towards him/her as well as give more meaning to positioning and tactics. This is contrary to popular EQ-esque games such as World of Warcraft where the only thing that has a say as to whether an attack lands is the attacker's character skill and the defender's character skill in the corresponding skills. Essentially, PVP is dumbed down to timers and dice rolls, leaving the player in the background when they should be the most important factor in the battle.
In Asheron's Call this was done by using collision detection and a crude tracking algorithm for war magic bolts and missile attacks (bows/crossbows). The server would anticipate where the player would be by processing their speed of movement in a direction against the speed of the projectile (arrow, xbow bolt, or war magic bolt) and directing the projectile to that point. This tracking was crude as the player could through it off by changing direction rapidly sliding side to side while casting or performing actions, thereby throwing the tracking off. Eventually Arc war spells were added that were extremely fast and had no tracking, simply traveling directly to the location of the player at time of spell release. This caused players to need to develop new techniques for dodging. This led to large variety of amazing casting techniques (the way in which the player slid while spellcasting to dodge projectiles) coming about and creating tremendously fluid and fastpaced fights.
By having the ability to develop unique methods of dodging attacks manually, every player was different. You truly were only as good as your skill at dodging made you. If you sucked at it, you got owned. If you were great at it, only those as good or better than you could touch you. While player's items in Asheron's Call did in fact play a decent part, they were no where on par with the level of necessity that grinding epic gear in World of Warcraft is. The skill of the player generally determined the outcome of the fight, and that is how it should be.
yours," it is instead who is more skilled at combat and adds a new level of complexity and enjoyment to the battle.