Capacitive proximity sensors (CPSs) are ubiquitous because of their simple design, low cost and low consumption. Capacitive displacement sensing, as one of the three sensing modalities, works for long distance and can be unitized to measure more physical quantities compared with capacitive volume and deformation sensing. In this paper, we firstly introduce the concept of capacitive displacement sensing. After that, we present applications of capacitive displacement sensing under three broad categories: distance measurements, indirect measurements, and the applications applied in smart environments. Finally, we discuss the challenges and possible solutions for CPSs development. We show that both the detection range and accuracy of CPS can be improved by multi-sensor fusion, and the application scenarios can be extensive through machine/deep learning approaches. We aim to provide a comprehensive, and state-of-theart review of the capacitive displacement sensing, and inspire more researchers and developers to find wide application perspectives.INDEX TERMS Capacitive proximity sensor (CPS), capacitive displacement sensing, distance measurement, indirect measurement, smart environment.