You’re clearly leading toward the former, but I could just as easily make an argument for the latter.
In my experience, people with edifying jobs (usually because the problems are harder), are less likely to need to scratch the same itch outside of work.
I think requiring side projects not only shrinks the candidate pool, but also leads to adverse selection.
Of course, there's not enough data to make a foolproof conclusion but I'd say that so far for me, having side projects that a dev can show is a clear indicator that they are an interesting candidate.
And when counting side projects, I count tools developers make to make their life easier and in my experience even great developers with edifying jobs will have situations where they create some small tools to help make their life easier.
Everyone has a finite amount of time, they have other shit to do. The vast majority people irl just code for work. Are they bad programmers? Of course not.
I would say for the average employer paying an average salary, demanding you to showcase a portfolio of hobby project is plain obnoxious. The interviewer can hope the interviewee does some hobby projects and lives and breathes coding but demanding it as a baseline assessment for an interview is absurd.
For the average programmer when they have absolutely have nothing else to do maybe they will work on their sideprojects which even takes a backseat because they have to keep learning new crap every other week to make sure they are up to date.
So you’re expecting people to work more than 40 hours a week?
IMHO It's still better than leet-coding questions because most developers don't need to use the skills gained from practicing leetcode when at work, whereas open source contributions and projects are valuable. Also, someone with no time outside work and family would struggle with both leetcode and having side projects.