Abstract: Amidst growing concerns over global environmental pollution and fossil fuel depletion, developing functional carbon materials from green and renewable biomass is a promising strategy that aligns with carbon peaking and carbon neutrality goals, as well as the principles of sustainable development. Among various biomass resources, algal biomass, regarded as a highly promising third-generation feedstock, offers unique advantages. It does not occupy arable land or compete with food crops, and its short growth cycle enables rapid proliferation, resulting in a yield per unit area significantly higher than that of traditional biomass. Additionally, algae can effectively absorb nutrients such as nitrogen and phosphorus from water during growth, thus contributing to the mitigation of eutrophication. Moreover, algae are inherently enriched with heteroatoms such as nitrogen and oxygen, allowing for in-situ heteroatom doping during carbon material synthesis without the need for additional dopants. This inherent compositional advantage makes algal biomass an excellent precursor for preparing functional carbon materials. This review systematically summarizes the research progress on functional carbon materials derived from algal biomass. First, it provides an in-depth analysis of the raw material characteristics of various algal types, including proximate analysis, elemental composition, and specific component data, thereby highlighting their potential as high-quality carbon sources. Subsequently, the review elaborates on relevant preparation methods, encompassing three fundamental carbonization techniques: pyrolytic carbonization, hydrothermal carbonization, and microwave carbonization. It also compares the effects of key processing parameters on the performance of the resulting carbon materials. Furthermore, it thoroughly discusses three commonly used activation and modification strategies—namely, physical activation, chemical activation, and metal salt/oxide modification—and their roles in optimizing pore structures and tailoring surface functional groups. The review also highlights the applications of algal biochar in three key areas: adsorption, energy storage, and catalysis, demonstrating its diverse application potential. Finally, it summarizes the critical bottlenecks in current research, including high algae collection costs, batch-to-batch compositional inconsistency, difficulties in fine-tuning microstructures, performance gaps with commercial alternatives, and the absence of mature large-scale production technologies. This review provides valuable insights and serves as a comprehensive reference for future theoretical studies and industrial applications.