The creation of bioactive peptides (BPs) from dietary proteins holds considerable promise for the expansion of functional foods and nutraceuticals. BPs have a variety of important roles in the living body, including antioxidative, antimicrobial, immunomodulatory, hypocholesterolaemic, antidiabetic, and antihypertensive properties. To preserve the quality and microbiological safety of food items, BPs have been used as food additives. Additionally, peptides may be employed as functional components in the treatment or prevention of chronic and lifestyle-related disorders. This article's main goal is to draw attention to the functional, dietary, and health advantages of using BPs in food items. Therefore, it examines the mechanisms of action and medicinal uses of BPs. This review also focuses on various uses of bioactive protein hydrolysates for enhancing food items' quality and shelf life as well as for bioactive packaging. Researchers interested in physiology, microbiology, biochemistry, and nanotechnology, as well as members of the food business, are advised to read this article.