Point being, one doesnt need an uber difficulty setting to make a challenge, the same thing can be achieved by making it more difficult (but not impossible) for players to become 'too powerful' (I concede the term is subjective).
I've already stated a couple of my challenge goals in an earlier post, and these are more in keeping with the theme of the series.
I concede that its a little too easy to level up smithing, but neither is it the gamebreaking problem people make it out to be. Levelling up skills in a roleplaying game is always a representation of effort. When armour degradation was taken out, smithing replaced it with an ability that most characters would not focus on strongly, because how often do you need to make armour? Its not very often, and it makes me laugh when people claim they were roleplaying their character because their character would want to be the best, so would study to become the greatest blacksmith the world has ever seen, just so they could create daedric armour. Seriously.. thats the character? ... its .. not a normal character is it.
A better balance would be that daedric armour makes town guards attack you for wearing the armour of the demon race that tried to destroy the world 200 years ago. It'd be like turning up to a war veteran meeting in a nazi uniform. That would make me smile. That .. would be awesome.
Yes you have the best armour in the game.. but you best take it off before heading into town....
:-) Obviously it depends on how you approach the game. My own outlook is very very much biased, and I admit it, because I've played three characters now, and not once have I ran into a problem with balance. Often, proposed changes make the game worse for me.. so selfishly, I would like to retain a game I love. Some of the smithing solutions aren't bad thou, but frankly completely pointless. If someone wants daedric straightaway, diminishing returns won't stop them from gaining daedric at the start of the game, it just takes them longer.. it makes no difference to their game experience other than you made it more boring for them.
At the end of the day, grinding a skill like smithing, enchanting, alchemy is not affected by game difficulty, its always done in safe areas and the materials can be obtained without difficulty affecting it... making it harder.. just makes it more of a grind, and I think Bethseda wanted to avoid WoW grinding. I don't see what making it harder really achieves.