My main problem with this proposal, is that WE all know that $500 buys you a rough prototype or a proof-of-concept. But a quick search through Elance or Odesk shows that there are many many potential clients who seriously expect a fully-polished product for that amount. What happens to the poor contractor when the client comes back with a huge changelist, which they're honoured to complete before getting paid?

Having said that, there was a pretty successful version of this idea implemented for designers a while back.