The idea with an Avatar is that a person can upload something to represent them, for example, using a cartoon character. Many sites uses avatars and members generally like them. Of course a person can upload a self photo to use as an avatar. If you want a site where the thumbnails are just photos of the members, then don't use avatars and let the profile photos be the thumbs. It just depends on what you want and how you are going to be using Dolphin.
There is a bug in Dolphin that I still see in 7.1.4 and have made a note here in the forums but not a ticket as I can not make tickets. If you increase the size of the thumbs when not using the avatar, the way that Dolphin calculates the offset to create a thumb will result in photos being crop and members will have the top of their heads cut off. I rewrote the offset code to prevent it on one site where they wanted large thumbs of the members (not using avatars).