Regarding the exceptionally high strength to weight ratio, suitable elastic modulus, and low density, carbon fibers are considered key materials in advanced industries. However, the high cost of conventional petroleum-based precursors, particularly polyacrylonitrile, and the dependency on fossil resources impose significant limitations on the widespread development and commercialization of these materials. In this regard, lignin as the most abundant natural aromatic polymer and by-product of the pulping industry and biorefineries has emerged as an attractive bio-based precursor for carbon fiber production due to its economic, high abundance, and rich carbon content. This paper reviews the current status of the carbon fiber industry and classifies them based on precursor type and quality, while analyzing the chemical and physical structures of native and technical lignin. Various types of technical lignins and their characteristics, along with the advantages and limitations of utilizing this material in the carbon fiber manufacturing process are evaluated. Furthermore, the key processing steps of carbon fiber production is addressed, and the technical challenges of each stage are elucidated. The findings indicate that while lignin is a highly desirable option from both economic and environmental aspects, and its derived carbon fibers hold great potential for electrochemical applications. However, several bottlenecks including structural heterogeneity, broad molecular weight distribution, intrinsic brittleness, poor spinnability, and unfavorable behavior during the stabilization stage limit the attainment of mechanical properties comparable to polyacrylonitrile-based carbon fibers. Nevertheless, structural modification of lignin and process optimization can lead to the development of high-quality, low-cost, and sustainable lignin-based carbon fibers.