Conserving biodiversity in the face of ever-increasing human pressure is hampered by our lack of basic information on species occurrence, distribution, abundance, habitat requirements, and threats. Obtaining this information requires efficient and sensitive methods capable of detecting and quantifying true occurrence and diversity, including rare, cryptic and elusive species. Environmental DNA (eDNA) is an emerging technique that can increase our ability to detect and quantify biodiversity, by overcoming some of the challenges of labor-intensive traditional surveys. The application of eDNA in ecology and conservation has grown enormously in recent years, but without a concurrent growth in appreciation of its strengths and limitations. In many situations, eDNA may either not work, or it may work but not provide the information needed. Problems with (1) imperfect detection, (2) abundance quantification, (3) taxonomic assignment, (4) eDNA spatial and temporal dynamics, (5) data analysis and interpretation, and (6) assessing ecological status have all been significant. The technique has often been used without a careful evaluation of the technical challenges and complexities involved, and a determination made that eDNA is the appropriate method for the species or environment of interest. It is therefore important to evaluate the scope and relevance of eDNA-based studies, and to identify critical considerations that need to be taken into account before using the approach. We review and synthesize eDNA studies published to date to highlight the opportunities and limitations of utilizing eDNA in ecology and conservation. We identify potential ways of reducing limitations in eDNA analysis, and demonstrate how eDNA and traditional surveys can complement each other.