Oncolytic virotherapy, a type of nanomedicine in which oncolytic viruses (OVs) are used to selectively infect and lyse cancer cells, is an emerging field in cancer therapy. Some OVs exhibit a specific tropism for cancer cells, whereas others require genetic modification to enhance their binding with and entry into cancer cells. OVs both kill tumor cells and induce the host’s immune response against tumor cells. Armed with antitumor cellular molecules, antibodies, and/or in combination with anticancer drugs, OVs can accelerate the lysis of cancer cells. Among the OVs, vaccinia virus has been the focus of preclinical and clinical research because of its many favorable properties. In this review, the basic mechanisms of action of OVs are presented, including their entry, survival, tumor lysis, and immune activation, and the latest research in vaccinia virus-based virotherapy and its status as an anticancer nanomedicine in prospective clinical trials are discussed.