Algae-derived functional foods are a rapidly growing field in global nutrition, healthcare, and sustainable food production. Functional foods can effectively leverage the biochemical repertoire of algae (both micro and macro), which includes high-quality protein, bioactive peptides, complex polysaccharides such as fucoidan, alginate, carrageenan, and beta-glucans. Algae are also rich in lipids enriched with essential ω-3 polyunsaturated fatty acids (notably EPA and DHA) as well as antioxidant fat-soluble pigments, carotenoids (like astaxanthin, fucoxanthin) and water-soluble pigment phycobilin, and various phenolic compounds. These components exhibit a broad spectrum of health-promoting effects, including antioxidant, anti-inflammatory, immunomodulatory, prebiotic, cardioprotective, and neuroprotective activities. This chapter provides a comprehensive overview of recent advances in algae-derived functional foods, highlighting the bioactive compounds, health effects, and innovative applications in the food industry. However, production variability, lack of quality control, high production costs, limitations due to taste and odor, low bioavailability, and a strict regulatory framework are hindering widespread application in this field. Recent studies highlighted the potential of advanced extraction technologies (enzyme-assisted ultrasound, supercritical fluid extraction), nano-encapsulation, genetic optimization, hybrid cultivation methods, and biosensor-based quality control systems. In the future, large-scale clinical validation, standardized protocols, consumer-acceptable formulations, and the inclusion of blue economy frameworks will play a significant role in making this industry viable and sustainable. The aim of this chapter is to highlight the role of algae as a sustainable solution for future nutrition and health, and to outline the challenges and opportunities that will shape the next generation of functional food products.