Before I typed in the title of this post, I checked the blog's history. Can it be? I haven't written a post titled "Death Penalties" before? That was a surprise.
But then, perhaps not. Death Penalties are boring. They have been discussed for forever and there is just no solution. There's just no perfect death penalty. Do you expect to finish reading this post knowing a brilliant new death penalty? Exactly my point.
The first problem is to find out, how harsh your death penalty, considering your game, really is. For example, in a WoW-like game any death penalty that includes item-loss is game-breaker! In a game like Eve, where there are no epics, and (mostly) no item grind, where (most) items are just tools to be crafted, used and sold, item-loss is a possibility.
To determine the actual harshness level, I suggest to imagine what the player is likely going to do after a 'typical' death. Is he going to run/wait for 20 seconds and continue with whatever he just did? That's the least harsh penalty. Does the death penalty end his immediate adventure? That's quite harsh. Is he going to have to invest major amounts of time to rebuild his character / wealth? That's very harsh. Does the death penalty have any chance to maker him rage-quit? That's too harsh.
Contrary to what the name implies, death penalties are not supposed to punish players. Instead, the purpose is to make them not want to die. That's a big difference! In a perfect world, a player would really, really hate to die, but once he does, he doesn't care and moves on to new adventures. And that's exactly why most kinds of aftermath are wrong!
You don't want your players to become annoyed about their death long after they have died! It has to be a clear cut! You want them to forget about it as soon as possible. You just want them to not want to die before they die. The perfect death penalty is an extremely effective deterrent, but completely harmless once it has actually happened.
Death penalties have to feel fair. The player needs to blame himself if he dies. He needs to feel in control for as long as possible and like he dies due to his own actions! If he doesn't feel in control, it must have been a conscious, prior decision to give that control up. Fairness is the more important the more harsh the death penalty is.
Finally there's the simulation aspect of the death penalty. Does it actually make sense in the game's lore? If you are free to choose your lore, choose one that makes your death penalty make sense. It's a real bonus.
Completely unrelated: I love this.