Honestly, if it means more people queing doing pvp I'm all for allowing units to revive, it would also give ppl a reason to lvl units past 5 for pvp.
For heros and dragons, might I suggest limiting the purchase of them to 1 per town ( 1 of each dragon, 1 of each hero, etc.) and simply allow them to be revived at a gold fee, maybe a small wealth fee in addition to gold for hero's and dragons. For myself I have no desire to blow money on something I'll just lose, but if they were permanent I would be much more interested in having them in each town.
As for the argument of it reducing the challenge, it depends on which challenge you refer. The actual challenge of pvp battles would not be hindered by this, but the over all challenge of the game itself would be in the sense that you would have to grind out those lvl's again, but how many people bother lvling troops beyond 5 before doing pvp? Probably only the 1st one or 2 match's. I will definitely concede the point of satisfaction from knowing you caused real damage to someone, especially if they lost a highly lvl's dragon or hero that they payed real money for, or the hunter dragon that you only get once, but that's because I'm a sadist, not sure if sadism is conducive to this game tho.