The multiple characters idea sounds nummy for sure.
The very first idea that popped into my head was actually more of a 4th-wall filter sort of challenge. Specifically, trying not to use a certain type of word or certain letters during the entire battle, maybe changing the restrictions up every so posts. Of course, that doesn't give any sort of setting or power level indication.
So time for something able to be worked with.
Another idea would be a sort-of King of the Hill tournament. Each participant would post an intro before a random character would be chosen to experience a temporary increase of power, maybe even a whole tier's-worth depending on the starting power level agreed to. This power would make them a target for the others, and after a death/loss/forfeit of any character a new 'King' would be chosen, repeating this process until only two participants remain. At that point, both get a major upgrade and fight it out for 1st and 2nd.
A very interesting prospect might be having a theme being thought of by each participant, that theme being given to a (preferably unknown) partner. The themes could be an emotion, an idea, an inanimate object or something of the sort, the goal being to force creativity in order for the partner to work with the theme. Something like anger or lasers would be a no. Something like abandonment or a box would be a yes. Being forced to create a battle-ready character off the theme provides a potential challenge in itself, and the combination of these themes as a team makes for an interesting match.
Again using the pitch-in of ideas thought, each participant would provide an nonlethal situation that would be added to a list, which would be used to randomly choose a setting for a round of battling. Having to post about being in free-fall one moment and dealing with increased/decreased gravity the next seems fun to me.
Having any single or combination of the ideas slapped onto the squad, robot or squad of robots battle would add in some variety and a very nice workout for our creative muscles. Being forced to pick only one idea, I'd personally choose the create from a given theme one.
I'm the kind of guy that would love being handed a paperclip and string for making a weapon of untold horror, if you couldn't tell