<p><i>Erythrina edulis</i> (pajuro) is a native Andean legume with promising nutritional and functional properties. Its seeds possess high-quality protein content and a favorable amino acid profile, characterized by residues such as Trp, Tyr, Phe, Leu, Ile, Val, Pro, and Gly, which are critical precursors of bioactive peptides. Upon enzymatic hydrolysis, these residues contribute to diverse bioactivities, including antioxidant (Trp, Tyr), antihypertensive (Pro at the C-terminal), and antidiabetic (branched-chain residues at the N-terminal) functions, making it a valuable source for bioactive peptide production. This review highlights current evidence regarding the nutraceutical potential of peptides derived from <i>E. edulis</i> proteins, especially those generated via enzymatic hydrolysis and simulated gastrointestinal digestion. Based on a systematic literature search in Scopus, Web of Science, and Google Scholar, this review highlights that these peptides exhibit a broad spectrum of biological activities, including antioxidant, antihypertensive, antidiabetic, immunomodulatory, neuroprotective, and anti-obesity effects, and are largely associated with low-molecular-weight fractions. The multifunctional nature of these peptides, together with E. edulis’s rich composition of polyphenols, flavonoids, and essential minerals, supports their consideration as sustainable ingredients in functional food development. However, limitations such as a lack of in vivo studies, challenges in process scalability, and underutilization of the crop remain. Future perspectives emphasize the integration of biotechnological tools, including ultrasound-assisted hydrolysis and bioinformatics-guided peptide design, to enhance bioactivity discovery and application. This review provides a foundation for the revalorization of <i>E. edulis</i> as a source of nutraceutical peptides, promoting their inclusion in food systems aimed at health promotion and sustainability.</p>