Haven't had time to process it fully yet, but my initial thoughts are:

1. There should be a commit and reveal process. You are already complicating the actions required of curators so that is not for regular people anymore. Also the time periods involved are short. So it is not too much to ask of them to first make their commitment to the blockchain, and then when the first stage is over make the reveal in an appropriate time. If they do not reveal in time, their prediction is automatically considered wrong. Using commit-and-reveal means less information is available to other curators and I think this closeness penalty thing becomes less necessary.

2. The closeness penalty seems flawed and even if it was fixed I dislike it compared to something else, like commit-and-reveal. It seems like an attempt to prevent copy cat predictors, something commit-and-reveal would handle better. The formula provided `CP = (1 - abs(EP-P) / EP)^2` means there is no penalty  if someone votes exactly the same as someone else. Even if you meant `CP = 1 - max(0, (1 - abs(EP-P) / EP))^2`, it still seems like sacrificial sockpuppet bots could still easily ruin the prediction market system for others at virtually no cost. 

3. The time is so short. I understand that votes, which determine the outcomes, are coming in  early and so you want the curators to make their predictions before that. I think instead that each curator's reward should be based on what additional information they provide to the blockchain beyond what is already known from voters. So as of the time a curator makes their hidden prediction, the amount of `abs_rshares` voted for the post up to that point is recorded. Then, after the reveal stage is over, that number is divided by the total `abs_rshares` that ended up voting for the post, which gives the fraction that is used in modulating the curator's share of the curation rewards. Someone who makes a very accurate prediction after nearly everyone has voted should get nearly 0 rewards because such a prediction is easy to do and adds no value. Someone who makes a close prediction well before most votes arrived gets rewarded far more. This mechanism would still mean that curators would need to vote early to get the most value out of their predictions. But the time scale would no longer be hard-coded but instead dependent on how quickly the people who would eventually vote on the post actually do vote on the post relative to its creation time. So a post may be submitted at a time when the people who would most appreciate the post are sleeping. And perhaps those awake are not aware of the fact that people who will appreciate and upvote the post soon are still sleeping. Then when one of these people wakes up, they can see the post (which may have been submitted hours earlier), recognize the value, notice that there are currently both few votes on it and few predictions, and make the decision to make a prediction based on their knowledge that their peers in their timezone waking up will very likely be upvoting it soon. Or some post that is days old with few votes may suddenly become relevant because of some world event. Those who are quick to make predictions on that post before the votes start coming in can still make a nice profit if their prediction turns out to be true.

4. None of this addresses the issue that without a reward for voting (not curating, but voting), there is no financial incentive for voters to upvote other people's post (that they believe will be valued by the community) rather than just upvoting their own posts. The superlinear payout for voting rewards of a post means that voters can earn more money upvoting the successful posts (which ideally would be the *good* posts) rather than just voting their own posts to try to get a share of the rewards stream.

I'll add more thoughts and possible other recommendations after I think about the proposal more deeply.

> The only people who will qualify for curation rewards will be those who make the best predictions on the future payout.

This will exclude ocasional users from being curators and may also frustate newcomers that dont get to be curators from using the platform.... steemit would become more like gambling site for a select few

I think steemit needs to be kept simple, I dont think bots will be an issue once steemit has 100.000 users because it is impossible to predict what contents may become viral,  however if @ned and @dan think upvote bots are distorting the curation process I think its best to remove the rewards all together.

KISS (KEEP IT SIMPLE STUPID) is the name of the game. 

I am not that bright when it comes to details but in terms of adoption,  assume the average user has an IQ of 85. 

I personnaly know no one in real life that could tell me what a prediction market is. Every new behavior that need to be learned is additional friction to adoption.

Your hypothesis should be tested as a plugin for Steem. Let the current curation and this new prediction market form exist side by side. Have a "test" or "alpha" version of the site for the extremely new features sort of like how Slashdot has it's beta site tested. Gather real usage statistics and feedback from the users of the new system and compare it with the old.

But I don't support any change which takes away from the old model without first testing and proving the new model through an A/B test or hypothesis test of some sort at least. If the data supports the new model then conduct a poll to see if the users prefer the new model and if more do then switch over.

IMO this will make it more complex for the regular Joe, steemit main value proposition is being a decentralized social network, not a social prediction market... I think the bot problem its being exaggerated and instead of implementing this complex prediction market idea I would prefer if voting rewards are reduced or even eliminated.

So the question  is : how we fix the fucked up system and we still keep our huge stake untouched?
The answer is:  there is no such way... but you can keep on trying.

How would be the user experience?
Reddit style experience would gone! Which user want to type numbers for each post (predict)... only professional curators... and what will be the interaction with the rest majority of users? Just reading quality pre-prepared content?

I think the average user should participate simply just with his upvote OR  downvote ... else he can go to AUGUR and have the same experience...

PS I upvoted the post because of the brainstorming and not because I want this change!

Three questions:
1. Would the curation reward be the same size as currently? This would result in people predicting mostly hight-quality content and omitting low-quality posts.
2. Could I reduce my accumulated penalty by posting low quality content and predicting the outcome to my own vote?
3. Would it matter if whales could adjust the outcome?

If predictions must be entered within 30 minutes of posting, what happens when one of your favorite content creators is on the opposite side of the world and consistently posts in the middle of the night while you're sleeping?

I'm not sure whether a reputation score is needed and I'm increasing;y unsure whether there is even a problem at all that needs fixing. The allocation of rewards among participants is largely zero sum and the system is inflationary (and will likely be inflationary in practice even for SP holders) which means anyone who gains less-than-average rewards (including dumb bots, at least relative to smarter bots) is actually losing.

I guess the idea of a reputation is to penalize those who participate but make bad predictions more than those who don't participate at all, but I'm not sure that is even desirable from first principles. I suppose you could say that people who don't even have any SP are also spectators but aren't penalized, so that would be an argument for it.

I can't spend all of my time here reading these long well thought out post! I have too many titles and authors to skim within seconds and upvote as fast as possible. Could you please reduce your post to one sentence from now on so I can get on with securing a lifestyle of the rich and famous by clicking my mouse button? ;)

It sounds like the best way to play this game is to just continue doing what most bots are currently doing ... focus on dan, ned and any business tied to Steem and only upvote their post. Only now you get to play a game of predicting the monetary value of their post.

Why would anyone, that wants to earn for curating, waste their time on any other accounts? We all know (my assumption) going in that things will continue in this fashion. We're told that 20 votes is best to prevent from diluting our voting power and that creates a situation where the curator will/should focus on only 20 accounts/post they know will consistently be upvoted (dan, ned and steem related service accounts).

Why would a curator waste time on upvoting the new guy who just made a great post if they risk not only a financial gain from doing so, because other "curators" are only focusing on the "Big 20", and also give up one of their precious votes (assuming a 20 vote dilution limit) on the new guy?

Risk taking by actually attempting to curate good content, from new users or lesser known users, is not beneficial in this scenario afaict. I simply don't see most "curators" branching out to take risk like this very often when you can continue doing what works and make a steady income. 

I'm not very bright (and it shows), but I simply don't see this changing human behavior one bit. I think it will eliminate most unsophisticated bots, but it will do very little to change the human desire to maximize their own rewards using the easiest method possible. And the easiest method is to continue doing what's been proven to work ... upvote dan, ned and any steem related service account.

That's my 2 STEEM.

Edit: grammar.