A challenge is an informal to somewhat formal competition to build a creation(s) according to a provided set of rules for which the winner(s) will usually receive no physical prize. Challenges are sometimes issued by individual fans(AFOLs) to other fans to test creativity, inspire building or simply for entertainment.
In the AFOL community a challenge is different from a contest usually in the number and complexity of the rules and/or the awarding of physical prizes - usually brick built trophies and/or LEGO sets or other products. Contests are usually sponsored by a person or organization(s) who then provide the prizes. Sometimes a specific challenge will prove popular and become a contest at a LEGO Users Group (LUG) meeting or other event.