Another huge problem with take home challenges is that they are one time use. At least if you're grinding leet code questions you're spending time that is useful at multiple companies.

I have a big folder on my computer of homeworks I've finished for various companies over the years. If I recall I passed all of them, it's sort of annoying that I can't simply hand over this list of other projects I've passed and say "here, all of these companies thought this was good".

What I like about your proposal is that if many other companies did it, the result would be every few years I should take a month of evenings and build out a cool project for myself demoing my ability to write code. If life gets to busy, it's fine if the project ages a bit.

This way you can scratch a personal itch and prep for interviews all the same time.