Microalgae have emerged as a sustainable and efficient source of protein, offering a promising alternative to conventional animal and plant-based proteins. Species such as Arthrospira platensis and Chlorella vulgaris contain protein levels ranging from 50% to 70% of their dry weight, along with a well-balanced amino acid profile rich in essential amino acids such as lysine and leucine. Their cultivation avoids competition for arable land, aligning with global sustainability goals. However, the efficient extraction of proteins is challenged by their rigid cell walls, necessitating the development of optimized methods such as bead milling, ultrasonication, enzymatic treatments, and pulsed electric fields. These techniques preserve functionality while achieving yields of up to 96%. Nutritional analyses reveal species-dependent digestibility, ranging from 70 to 90%, with Spirulina platensis achieving the highest rates due to low cellulose content. Functionally, microalgal proteins exhibit emulsifying, water-holding, and gel-forming properties, enabling applications in baking, dairy, and meat analogs. Bioactive peptides derived from these proteins exhibit antioxidant, antimicrobial (inhibiting E. coli and S. aureus), anti-inflammatory (reducing TNF-α and IL-6), and antiviral activities (e.g., Dengue virus inhibition). Despite their potential, commercialization faces challenges, including regulatory heterogeneity, high production costs, and consumer acceptance barriers linked to eating habits or sensory attributes. Current market products like Spirulina-enriched snacks and Chlorella tablets highlight progress, but food safety standards and scalable cost-effective extraction technologies remain critical for broader adoption. This review underscores microalgae’s dual role as a nutritional powerhouse and a source of multifunctional bioactives, positioning them at the forefront of sustainable food and pharmaceutical innovation.