A large amount of food-grade animal by-products is annually produced during industrial processing and they are normally utilized as animal feed or other low-value purposes. These by-products are good sources of valuable proteins, including collagen or gelatin. The revalorization of collagen may lead to development of a high benefit-to-cost ratio. In this review, the major approaches for generation of collagen peptides with a wide variety of bioactivities were summarized, including antihypertensive, antioxidant and antidiabetic activities, and beneficial effects on bone, joint and skin health. The biological potentials of collagen peptides and their bioavailability were reviewed. Moreover, the unique advantages of collagen peptides over other therapeutic peptides were highlighted. In addition, the current challenges for development of collagen peptides as functional food ingredients were also discussed. This article discusses the opportunity to utilize collagen peptides as high value-added bio-functional ingredients in the food industry.