The growing concern about the long-term effect of synthetic plastic packaging for food has caused growing interest in seeking out renewable alternatives, especially those that valorize the underutilized bio-based resources. Among these underutilized sources is lignin, which is an abundant aromatic polymer that is derived from lignocellulosic biomass, and which is produced in abundance as a byproduct of industrial processes in the paper pulping and bioethanol industries. Lignin has recently shown promise a high-value additive and functional material to be used in sustainable food packaging solutions. This chapter examines the structural attributes of lignin, its functional potential and the role that extraction method plays in determining its performance in high-performance applications. The chapter also looks at certain key benefits such as UV protection, antioxidant activity, and hydrophobicity as it relates to their relevance in smart packaging systems. At the same time, challenges related to dispersion, thermal stability, regulatory ambiguity, and market scalability are discussed. Considering both the strong points and drawbacks of lignin’s properties as it affects widespread adoption in the packaging industry, the chapter argues that lignin shows strong potential for improving food packaging through functionality, sustainability, and material circularity.