I don't doubt that the market can sort out the problem of ambiguous or badly-worded contracts (to within reasonable tolerances) but that's not the problem I'm talking about. The key innovation in this proposal is to use a p2p system of consensus witnesses to settle the contracts. It looks to me like the p2p system will collapse into de-facto centralization, at which point the incentive system, which is supposed to be designed to incentivize getting to true outcomes, will actively prevent the market from correcting.
Alright, you didn't like my concrete example of why the system can be self-correcting; so could you offer a concrete scenario of how an existing prediction market contract from Intrade or somewhere could collapse into a perverse equlibrium? (Being partially centralized is not a bad thing: Bitcoin mining is pretty centralized these days. I don't mind if everyone is getting their figures from an authority like the BLS.)