ToME: the Tales of Maj'Eyal

Character Graveyard or Spirit world, or both.

A location in the world or as a small tribute game mode, that you can wander around, where all your old dead characters are stored, either as gravestones or spirits.

Ideas, some or all for each type.

(Spirits) You see them as they were when they were alive.
(Gravestones) Screenshots at the moment of death.
(Gravestones) You can alter the message on them.
(Spirits) You can duel one or a pair of your former characters in spirit form.
(Spirits) You can have them repeat one line of text when you interact with them, like gravestones.
(Both) Quests - They, or it, might even send you out on a quest, if the devs are feeling generous, perhaps to avenge an NPC that killed them (using the same name and type)
(Gravestones) Quests - Their equipment might have been looted, a quest to find the looters.
(Spirits) Leads to a new class working with dead spirits.
(Both) Mage Class which can summon old skeletons or spirits with the names of your dead characters.
(Both) Might think of it like a players house in other games, can pretty it up with achievements if you like.

Some ideas, doesn't need all or even many to work, but it'd be a nice tribute as you play.

Not sure about the more complex parts, but a graveyard containing your highest level dead characters would be entertaining. There's a bit in Embers that relates to prior winners you have iirc, so I think the tech might be there already.

It would be kinda cool to have a "high score" area where you can see your top characters. Not so sure about the quest portion of your idea, though.

Yeah I mean there is a lot of ways you can displays the characters that didn't make it, whatever everyone likes best.

As well as the two suggestions here, you could set it as a podium, or a building, or a pantheon for anyone that made it high enough. The arena code copies PCs, so I think its in part there, to fill X amount of slots with.

For example you could have a pantheon for the top 10, and then around the grounds random heroes pop up that didn't quite make it, or a graveyard for the rest nearby, whatever people best like the sound of.

Another example would be to type in the character's quote on death. - That gets put on their tombstone.