One place I interviewed with last year did something similar in that it was more of a BYOSD (bring your own system design). So it meant I got a chance to think through complex systems I've worked on, mock up a diagram beforehand, and then present it to the interviewer. They then drilled down on a lot of components, why decisions may have been made, etc. Sort of like what you're saying.
Out of all the similar interviews I did last year for that type of round, I enjoyed that style the most. Rather than your typical "build me an {ecommerce site, social network, video streaming site, url shortener}".
Square/Block (used to?) ask only 1 system design question and the recruiter would let you know ahead of time so you could prepare for it. Probably because it allows for deeper questioning and answering of relevant technical skills.
It’s hard to tell between those who know their stuff, and those who are good at memorising all the various courses that tell you what to say. By telling the candidate what system to design you make the latter’s job easier.
If someone can quickly learn enough about a system that they can convince a domain expert they understand it well in a deep technical discussion, they're probably a good candidate for hiring, since your business likely consists of many complex systems, and the candidate will theoretically be able to onboard faster.
I’ve seen first hand people hired who’ve aced the system design interview but then fail to get much done. Building systems in the real world is much more than a few high-level components and algorithms - it’s about all the edge edge cases, tricky stakeholders, ambiguous and changing requirements, sequencing and coordinating small pieces of work.
Attaining high level understanding and speaking convincingly about it are entirely different skills from knowing how to build it. Interviews are always a proxy anyway, your job will never be solely comprise of convincing people of your expertise. Sooner of later you have to do exercise it somehow. Unless you're the CEO, that is. The higher you go the easier it is to make a career out of being in the right places at the right times.
If you can't distinguish between those two types of people by asking additional questions about their design, are you capable of accurately evaluating them in the first place?
Out of all the similar interviews I did last year for that type of round, I enjoyed that style the most. Rather than your typical "build me an {ecommerce site, social network, video streaming site, url shortener}".