This paper presents a comprehensive review of the development and advancements in ultra-precision grating displacement sensors, emphasizing their fundamental measurement theories, technology evolutions, device development, current applications, and future trends. Grating displacement sensors, utilizing optical interference and photoelectric conversion principles, deliver exceptional resolution and accuracy, making them vital in high-precision fields such as semiconductor manufacturing, aerospace, advanced metrology, and microfabrication. The review examines key innovations in grating sensor technologies, including the integration of digital interference measurement methods, advanced signal demodulation techniques, and the application of pseudo-random binary codes for absolute displacement measurements. Furthermore, the paper assesses the impact of novel materials, sensor designs, and miniaturization on sensor performance, particularly in enhancing sensitivity, reducing environmental susceptibility, and improving long-term stability. A comparison of domestic and international research progress in grating sensor technologies is provided, identifying critical gaps and emerging research areas. Looking ahead, the outlook for the field underscores the potential for integration into digital twin techniques, artificial intelligence (AI), and hybrid sensor systems that combine displacement measurement with other sensing capabilities. The paper concludes by addressing challenges in the field, such as improving the signal-to-noise (SNR) ratio, enhancing sensor integration, and reducing production costs, while also spotlighting opportunities for further innovations to meet the escalating demands for ultra-precision measurements in next-generation manufacturing and other advanced applications. This review aims to provide a thorough understanding of the current state of ultra-precision grating displacement sensors and their potential to shape the future of high-precision measurement technologies.