Dry eye disease (DED) is the most common clinical ocular surface disease. Given its multifactorial etiology, no consensus has been reached on the diagnosis criteria for dry eye disease. Topical drug administration remains the mainstay of treatment but is limited to the rapid clearance from the eye surface. To address these problems, hydrogel-based materials were designed to detect biomarkers or act as drug delivery systems by taking advantage of their good biocompatibility, excellent physical and mechanical properties, and long-term implant stability. Biosensors prepared using biocompatible hydrogels can be sensitive in diagnosing DED, and the designed hydrogels can also improve the drug bioavailability and retention time for more effective and long-term treatment. This review summarizes recent advances in the use of hydrogels for diagnosing and treating dry eye, aiming to provide a novel reference for the eventual clinical translation of hydrogels in the context of dry eye disease.