Single-domain antibodies (sdAbs) have emerged as a promising tool in tumor immunotherapy, garnering significant attention in recent years due to their unique structure and superior properties. Unlike traditional antibodies, sdAbs exhibit several advantages, including small molecular weight, high stability, strong affinity, and high specificity. These characteristics enable sdAbs to effectively target and eliminate tumor cells within the complex tumor microenvironment. Moreover, their structural advantages enhance tissue penetration and reduce immunogenicity, thereby increasing their potential for clinical application. The potential applications of sdAbs include novel immune checkpoint inhibitors, bispecific antibody drugs, innovative immune cell therapies, antibody-drug conjugate therapies, and tumor molecular imaging diagnostics. Despite the promising prospects, several challenges of sdAb-based tumor immunotherapy still require further investigation. This review aims to summarize the status of sdAb-based immunotherapy, identify the challenges encountered, and evaluate the clinical research and application potential of sdAbs in this field.