I believe that this particular challenge(No Extra Lives) could be tweaked and improved to increase the enjoyability of the game. When I first saw it, I thought that it would be an awesome challenge (that was when I still thought it prevented you from gaining extra lives, but still allowed revival of a dead teammate if you picked up a 1up). I was a bit disappointed to learn that it makes death permanent (absolutely no revival, basically permadeath), since most players die at least once per act. With no way to revive, they leave the game as soon as they realize they won't be coming back.
I've played the game enough to want more challenge, but most of the challenges deviate from the traditional feel of the game (a traditional feel which I love). Sometimes I feel that hard isn't quite hard enough. If the 'No Extra Lives' challenge was tweaked to prevent the party from 'holding' extra lives (basically the lives are still always at 0), but still allow revival of someone who is currently dead when a life is picked up, I believe it would be a very fun and challenging challenge to use. Imagine the thrill when one or two people are dead and the survivors have to persevere to save their teammates! If this was the way the challenge worked, I can see myself religiously using it when I host a game. The thought that each person's life is very valuable and must be used carefully is an attitude I love in these types of games. But being permanently dead when you die kind of, well, sucks.
I've tried playing the game with 1hp enabled a few times, and I like it although it removes the usefulness of the priest and the paladin's heal (as well as other upgrades such as armor). I feel that playing with standard HP pools is much preferable in order to maintain usefulness of all classes. I've tried the other challenges out, but none feel as satisfying (or retain the traditional feel of the game) as I believe 'No Extra Lives' would, if it worked in such a fashion.
