The development of targeted drug delivery systems has faced challenges due to the complex chemical reactions involved. However, nano-sponges, a newly developed colloidal system, show promise in overcoming issues such as drug toxicity, poor bioavailability, and inconsistent drug release. These nano-sponges are small, porous structures that can be tailored to carry both hydrophilic and hydrophobic drugs. They are easily prepared by crosslinking cyclodextrins with various compounds, benefiting from cyclodextrin’s excellent biocompatibility, stability, and safety. Nano-sponges have a wide range of applications, including in the treatment of cancer, autoimmune diseases, and improving drug stability and bioavailability. They offer controlled and predictable drug release by adhering to target sites in the body, preventing drugs from circulating throughout. Additionally, they can be used for oral, topical, and parenteral drug delivery, as well as for delivering enzymes, proteins, vaccines, and antibodies. Nano-sponges are especially valuable for drugs with poor solubility, as their aqueous solubility enhances drug effectiveness. The preparation, characterization, and potential applications of nano-sponges have been extensively explored. These systems can be formulated to deliver drugs in a controlled fashion, addressing challenges such as drug degradation and poor site specificity. Their ability to carry both lipophilic and hydrophilic drugs makes them a versatile option in drug delivery. This review highlights the development, benefits, and challenges of nano-sponges, focusing on their potential in enhancing drug delivery systems and solving long-standing pharmaceutical issues.