|Subjunctive KoL: ArenaGuide|
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The Cake-Shaped Arena is a new area where you can battle your familiars against "house familiars" to gain experience and items. (Actually, apparently an Arena existed in KoL's past, too, but this incarnation is different from it.)
You can select one of four different competitions; different familiars have different strengths and weaknesses in each of the various competitions. Some of these are pretty self-evident, although some of them are rather mysterious (to me, at least). See ArenaMechanics for exact details.
Your familiars also gain experience depending on how close the match is (if they win, that is). See ArenaMechanics for exact details.
For every ten matches you win in the Arena, you'll win an item which helps your familiars out. See FamiliarItems for a complete list.