Before we have any more discussion, I highly recommend committing yourselves to using "karma charity", "donate karma", "receive karma" instead of "karma market", "pay karma", "paid with karma". It is aesthetically pleasing - juxtaposing karma with capitalism just grates on my sense of taste. It also has obvious framing benefits which we should not be above using - if the idea of participating in karma charity is attractive to one good programmer where buying and selling in a karma market is not, Less Wrong garners that many more improvements.
One difficulty here is that karma ranking boards still wouldn't optimally reflect status. Suppose PersonA did a ton of good work on Less Wrong and got 10,000 karma, and then donated all of that karma toward making some great project highly incentivized. This person has done two wonderful things - all the wonderful work and incentivizing more wonderful work - but they have 0 karma to show for it.
Solution: anonymise karma donations, announce the total pool of 10,000 karma, then on project completion return the largest single donation to its donor as well as giving it to the recipient. In PersonA's case, they lose no karma. This is deserved, because it is a generous move on PersonA's part. In usual usage, it will contribute slightly to karma inflation and encourage larger than usual prizes (think "closest guess to 2/3s of the average of all guesses wins" but growing instead of shrinking) without allowing people to game the system.
What's to stop Eliezer from donating 150,000 karma for anything he wants done, comfortable in the knowledge that he will receive his full karma donation back? Nothing except that this will drastically decrease his future power by massively devaluing karma. Anyone with enough karma to pull off that manipulation has too much invested in their karma to squander it.
Currently, LWers get +1 karma for a comment upvote, and +10 karma for a main post upvote. But clearly, there are other valuable things LWers could do for the community besides writing comments and posts. Writing isn't everyone's forte. Why not award karma for doing productive non-writing things? It's probably not optimal that karma and the community status that comes with it are awarded only for the thing that myself and a few other people are good at. For example, I really wish LW could award karma to programmers for improving LW.
The challenge is doing it fairly, in a way that doesn't alienate too many people. But there might be a workable way to do this, so let's explore.
Perhaps tasks could be assigned karma award amounts by LW editors (Nesov, Eliezer, Louie, etc.), or even just one person who is appointed as the Karma Genie.
Examples: