Wound healing is a complex process that requires effective management to prevent infections and promote efficient tissue regeneration. In recent years, upconversion nanoparticles (UCNPs) have emerged as promising materials for wound dressing applications due to their unique optical properties and potential therapeutic functionalities. These nanoparticles possess enhanced antibacterial properties when functionalized with antibacterial agents, helping to prevent infections, a common complication in wound healing. They can serve as carriers for controlled drug delivery, enabling targeted release of therapeutic agents to the wound site, allowing for tailored treatment and optimal healing conditions. These nanoparticles possess the ability to convert near-infrared (NIR) light into the visible and/or ultraviolet (UV) regions, making them suitable for therapeutic (photothermal therapy and photodynamic therapy) and diagnostic applications. In the context of wound healing, these nanoparticles can be combined with other materials such as hydrogels, fibers, metal-organic frameworks (MOFs), graphene oxide, etc., to enhance the healing process and prevent the growth of microbial infections. Notably, UCNPs can act as sensors for real-time monitoring of the wound healing progress, providing valuable feedback to healthcare professionals. Despite their potential, the use of UCNPs in wound dressing applications faces several challenges. Ensuring the stability and biocompatibility of UCNPs under physiological conditions is crucial for their effective integration into dressings. Comprehensive safety and efficacy evaluations are necessary to understand potential risks and optimize UCNP-based dressings. Scalability and cost-effectiveness of UCNP synthesis and manufacturing processes are important considerations for practical applications. In addition, efficient incorporation of UCNPs into dressings, achieving uniform distribution, poses an important challenge that needs to be addressed. Future research should prioritize addressing concerns regarding stability and biocompatibility, efficient integration into dressings, rigorous safety evaluation, scalability, and cost-effectiveness. The purpose of this review is to critically evaluate the advantages, challenges, and key properties of UCNPs in wound dressing applications to provide insights into their potential as innovative solutions for enhancing wound healing outcomes. We have provided a detailed description of various types of smart wound dressings, focusing on the synthesis and biomedical applications of UCNPs, specifically their utilization in different types of wound dressings.