You can make sharp prints from paper negatives. I suppose they may not be quite as sharp as a film negative, but it won't degrade a pinhole image significantly.
Note that when you make a print from a paper neg, you place the neg emulsion side to emulsion side with the print. The light is diffused some through the paper, but it isn't much different than what happens in a diffusion enlarger anyway.
Building it to take a standard holder is a good idea, but you could save that for a V2 since you have lots of material .

One small problem with using standard holders with paper is that a 8x10 sheet of film isn't quite 8x10 inches, so to use paper you'll need to trim it down slightly. The other problem with 8x10 holders is that they tend to be expensive, though you can get cheap ones that may need some repair and spend some sweat equity. Even with a cheap holder though, it will probably be the most expensive portion of your camera.

You can process your paper neg just like your prints in the same developer.