Hey Clay, very interesting idea.
If you're looking for ideas of interactive stuff for the site as well, the woodturning site I started years ago has been doing what we call the "Challenge & Trade" quarterly events. The idea behind them was to promote trying new skills, techniques and for folks to see/own the work of others they may not have been exposed to on their own.
How it works is the challenge is presented to the group and sign-ups are taken. Specs like min/max size are given to ensure projects are roughly equal. Entrants are given roughly a month to complete their challenge items. 2-3 days prior to the deadline, the list of sign-ups is randomized (using the http://www.random.org/lists/ website for fairness) and then posted. On the deadline date, folks post pictures of their completed projects and then mail them to their trade partner from the list.
Some examples of challenges that could work for LW.net:
New Experience challenge: use a new technique, material or tool you haven't tried before in a project
Interpretation challenge: take an existing theme/project and modify it to present it as a new (possibly improved) work
Project specific: coasters, trading cards, a specific pattern, etc.
Tool specific: create an item using only the tool/tools listed in the challenge
Here's an example of what we ended up with for the "Squares" challenge: http://www.woodturnersresource.com/wrphotopost/showgallery.php?cat=524
The project was to turn a project out of a 4"x4"x4" piece of wood. The trick to it was the finished item had to have a square aspect to it, which in woodturning isn't the easiest feat.