I think the analogy by Steve Yegge still holds: if you claim you're a juggler, you should be able to juggle in front of people at any time. So, yeah, coding challenges is a good filter, at least.
The problem is not coding challenge per se, but that people can now cram it on sites like leetcode. See, before we had leetcode, only two types of people could solve a large number of algorithmic problems organically: those who were naturally talented, and those who were so geeky that they devoured the works of Martin Gardner, Knuth, and the like. Excelling those challenges showed raw talent in old days.
And companies like the young Microsoft and young Google absolutely loved such talent, and such talent did shine in those young companies.
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