The best interview I ever had was a project-based interview with a YC company. We spent 9 hours implementing production code using a language (python) and framework (django) I'd never worked with before. Fortunately, python is close enough to ruby that we were able to successfully complete the project.

The position was a first-hire engineering lead so the length of the interview made sense. Obviously, this isn't reasonable for a normal position, but a scaled down version is a good approach. I would have loved to accept the offer and work with them but had to go with another company in the end. I was moving to SF with my family and needed a higher salary versus mid-salary + equity.

Now you have the overhead of possibly paying each person for some work, the paperwork that goes along with it...

I wasn't paid for this work and wouldn't expect to pay a dev for a 2 or 3 hour interview, which is what I would expect for a normal position.