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Quick: Name the simultaneously most iconic and useless power-up in gaming. If you said "the 1UP Mushroom," congratulations, you probably already know what I'm going to talk about here.
Too many games with lives systems shoehorn said systems in purely out of tradition; any thoughtful scrutiny of this scheme reveals little to no functional purpose.
New Mario games — including but certainly not limited to the Super Mario Galaxy series — throw 1UPs at you like bullets in a CAVE shoot 'em up…so much so that Super Mario 3D Land's lives counter includes a hundreds digit. The penalty for running out of lives? Nothing of note — you lose whatever checkpoint you had going on the level that killed you, but nothing stops you from just jumping back in. New Super Mario Bros. Wii even tracks how many times you continued, winning the coveted "most useless column in a game's database" award.
Oh wow, it tracks continues? That's much better than the level editor that could have easily been built in instead, something that was reverse-engineered by hackers in no time. Big N impressin'.
Older lives-based Castlevania titles and even a Zelda game (the woefully underrated Zelda 2: The Adventure of Link) were much more stingy with lives but gave the player passwords, saves, and/or unlimited continues. While there's a modest penalty for running out of lives (having to slog your way back to the Grim Reaper, getting punted all the way back to the North Palace), the penalty is ultimately more irritating than meaningful; little would have been lost in just dumping lives, and gamers wouldn't have to trudge through sections of the game they've already proven they can conquer.
The list of titles guilty of incorporating a useless lives system is too long to adequately document in a mere lifetime, but plenty of games from every era do it right.
Many shoot -em-ups, like Jamestown and Mars Matrix, do the lives thing correctly — they're limited and difficult to gather, but careful play will garner them long enough to get through the game. Most modern shoot -em-ups also allow you to either directly play a level or go through an arcade-esque gauntlet of all at once, letting you play whatever stage you want at your leisure or go through the whole game with limited lives.
One of the only four Wii games worth playing.
Kirby's Epic Yarn earned scorn for its lack of difficulty. But this criticism often wrongfully targets the game's lack of lives, or even a failure condition, when these are separate traits. Yes, you can play through Kirby's Epic Yarn haphazardly, just plowing through enemies, but you'll never earn a high score and unlock the game's secret levels. Had a difficulty selector been added, the lack of a pointless lives system would take nothing away from the game.
XBLA gems N+ and Bastion have clear checkpoints, with each game's failure condition putting you back to the last checkpoint — or, in Bastion's case, an easy mode with infinite continues for people who just want to see the story. N+ is brutally difficult, and it manages to be hard without a single, useless 1UP mushroom.
A note to game designers: Look to the titles that use lives well (if at all). Design lives systems thoughtfully or just leave them out altogether.