Abstract: Modern agriculture is undergoing a profound transformation from an intensive agricultural model, with yield as the core goal to the development of an ecological agricultural model. The role of microalgae in promoting the development of ecological agriculture is increasingly valued. As an important component of paddy ecosystems, the multifunctional development of microalgae for rice production has become a research hotspot in multiple disciplines, including agriculture, ecology, energy, and environmental sciences. This study systematically reviews the development of microalgal function and its application in rice production, summarizes the functions and mechanisms of microalgae in paddy ecosystems, and analyzes the opportunities and challenges faced by microalgae application in paddy ecosystems. The functional development of microalgae and their applied research in paddy ecosystems can be divided into four stages, which are 1) before 1950: the discovery and theoretical foundation of microalgae nitrogen fixation function; 2) from 1951 to 1980: global research on screening and application of nitrogen fixing microalgae in paddy fields; 3) from 1981 to 2000: research on the multifunctionality of microalgae in paddy ecosystems; and 4) from 2001 to present: research on the application of microalgae in modern sustainable agriculture. The functions of microalgae in paddy ecosystems include four categories: biological fertilizers and soil improvement, water purification and food sources, growth promotion and stress resistance, and biological pesticides. The current functional development and application of microalgae in paddy ecosystems have good opportunities, including the demand for agricultural non-point source pollution control, ecological agriculture development, and carbon reduction in paddy fields. However, there are shortcomings and challenges in assessing the composite impact of microalgae utilization in paddy fields, low-cost propagation and field application of microalgae, targeted regulation of paddy microalgae, analysis of microalgae action mechanisms, and extraction of functional substances. These directions are expected to be the focus of future research in this field.