Microbial fuel cells (MFCs) have emerged as a promising technology to convert biomass and organic waste into electricity, offering an eco-friendly and sustainable alternative to fossil fuels. Recent innovations in nanotechnology have significantly enhanced the performance and efficiency of MFCs by improving electron transfer rates, expanding surface areas, and optimizing the properties of anode and cathode materials. This review provides a detailed assessment of the fundamental and functional components of MFCs. These components include the anode, which facilitates the oxidation of organic matter, and the cathode, where the reduction of oxygen or other electron acceptors occurs. Another critical component is the proton exchange membrane (PEM), which allows the transfer of protons from the anode to the cathode while preventing oxygen from diffusing into the anode chamber. In addition to discussing these key elements, the article explores the role of various microorganisms involved in MFCs. These microorganisms, which include both naturally occurring species and genetically engineered strains, play a vital role in facilitating extracellular electron transfer (EET), a process that enables the conversion of chemical energy stored in organic compounds into electrical energy. We analyze different biomass pretreatment strategies, such as physical, chemical, and biological approaches, that enhance the breakdown of lignocellulosic biomass to improve energy output. Furthermore, the review highlights optimization techniques for improving biomass-powered MFC performance, such as electrode modification, pH control, and organic loading rate management. The application potential of MFCs is extensively discussed, covering bioremediation, wastewater treatment, biosensors, and power generation, with a particular focus on MFC-based biosensors for environmental monitoring and medical diagnostics. Despite their immense potential, challenges such as low power output, biofouling, and high operational costs hinder large-scale commercialization. To address these issues, we propose innovative strategies, including the integration of nanomaterials, electroactive microorganisms, and advanced membrane designs, to enhance the efficiency and reliability of MFCs. We conclude that nanotechnology-enabled MFCs, combined with engineered microbes and optimized system designs, hold immense potential for revolutionizing sustainable energy generation and biosensing applications, paving the way for a cleaner and more efficient future.