The biocompatible nanomaterials with smart sensor technology marks a transformative era in both environmental and biomedical monitoring. These biocompatible nanomaterials offer extraordinary and unique properties like high surface area, high aspect ratios, tunable electronic and optical properties, and minimal toxicity, making them ideal candidates for interfacing with biological systems and detecting trace levels of environmental contaminants. This chapter explores various classes of biocompatible nanomaterials-including carbon-based structures, metallic and metal-oxide nanoparticles and their integration into electrochemical sensing platforms. Applications environmental samples and biomedical samples are critically reviewed. The discussion extends to the physicochemical parameters and crystalline structures of nanomaterials, which critically influence their behavior and functional performance, synthesis strategies, biofunctionalization approaches, performance metrics, and real-world deployment challenges. Finally, the current challenges and future prospects of biocompatible nanomaterials for fostering their practical utilization in smart sensors are also addressed.