Indeed, I think it's a nice way to honor someone inside the family without directly naming a child after that person. Now, both my brother and I had names selected by our parents that there were no nick-names for. (My parents didn't want us to be named "Robert" but be called "Bob" or "Rob" or something along those lines, for example.) So both me and my brother have first names that have no common nick names. (Though if you really tried you could call us by the first syllables in our names and sort of make sense.)
My brother and his wife did the same thing with my niece, her first name is the same as my SiL's but her middle name is the first name of a family member on her side of the family. (My SiL goes by her middle name.)
I think middle names are somewhat necessary, however. As I do think it helps distinguish someone between someone with a similar name should that situation ever crop up in school or elsewhere in life. But other than that middle names have little purpose. My mother's middle name is literally just a letter.
Also, interestingly, my niece has the exact same name as my cousin's child and they both attend the same school (though my cousin once-removed is a couple of grades higher.) It's caused one or two messes in messages being delivered home by the administration re: parent-teacher conferences and other issues where the parent needs to be contacted. My sister in law even once got called by the school once told her daughter was sick and needed to be picked up. She drove to the school to do it only to find out it was the cousin that was sick and not her daughter.