It could be adding a feature to a side project, starting something new, or contributing to open source. (Or, we have some stock ideas if people need inspiration.) Rather than asking them to solve a problem they had never heard of before or use a codebase they're not familiar with, I get so much more out of watching them work in their own environment.
I can ask them questions about why they're doing something, and they tend to have much more detailed answers because they've been thinking about it for weeks. They're solving a problem they care about in a codebase they know, which mimics how working with them will be a few months in.
We can talk about tradeoffs and design decision, and I get a real sense for how they think. Plus, I've found most people are so much more comfortable and excited.
(If you're interested, I wrote a blog post about all the ways I've designed how we interview, to give everyone the chance to show off the best version of themselves: https://blog.readme.com/designing-a-candidate-focused-interv... And of course, I'm hiring!)