Board Thread:Questions and Answers/@comment-108.57.207.17-20140108232200/@comment-24185151-20140114100139

That idea has been suggested, which is why the Tavern challenges have a minimum prize of 1 gem before you can submit that challenge. The developers are thinking of extending this to the guilds and parties, but this hasn't gone past the brainstorming stage since I last checked.

The gems are transferred from your account to the winner's account. Hence, if you start a challenge with a prize of 1 gem, then that 1 gem is removed from your account and put aside. Once you select a winner of your challenge, that gem that was put aside will move to the winner's account. The rest of the participants don't receive a prize. Since only ONE user can be selected as the winner, only ONE person receives that prize.

I hope that clarify things better. :)