Balls of golden yarn are found in every level of Battleblock Theater. Collecting these balls of yarn usually proves to be a much more difficult task than collecting gems.

Like gems, yarn can be used in the gift shop. However, instead of buying prisoners with yarn, the player may bribe the cat guards on the top floor for weapons, each weapon costing 5 yarn.

The Narrator made a joke about the history of Yarn:

Yarn was invented in 1984 by Stanley Yarn. That time, it wasn't called "yarn". It was called "cat string", and people used to use it to lure cats to their home, because meat was very expensive. True story, the end.