Diabetic kidney disease is the most common cause of end-stage kidney disease and poses a major global health problem. Finding new, safe, and effective strategies to halt this disease has proven to be challenging. In part that is because the underlying mechanisms are complex and not fully understood. However, in recent years, evidence has accumulated suggesting that chronic hypoxia may be the primary pathophysiological pathway driving diabetic kidney disease and chronic kidney disease of other etiologies and was called the chronic hypoxia hypothesis. Hypoxia is the result of a mismatch between oxygen delivery and oxygen demand. The primary determinant of oxygen delivery is renal perfusion (blood flow per tissue mass), whereas the main driver of oxygen demand is active sodium reabsorption. Diabetes mellitus is thought to compromise the oxygen balance by impairing oxygen delivery owing to hyperglycemia-associated microvascular damage and exacerbate oxygen demand owing to increased sodium reabsorption as a result of sodium–glucose cotransporter upregulation and glomerular hyperfiltration. The resultant hypoxic injury creates a vicious cycle of capillary damage, inflammation, deposition of the extracellular matrix, and, ultimately, fibrosis and nephron loss. This review will frame the role of chronic hypoxia in the pathogenesis of diabetic kidney disease and its prospect as a promising therapeutic target. We will outline the cellular mechanisms of hypoxia and evidence for renal hypoxia in animal and human studies. In addition, we will highlight the promise of newer imaging modalities including blood oxygenation level–dependent magnetic resonance imaging and discuss salutary interventions such as sodium–glucose cotransporter 2 inhibition that (may) protect the kidney through amelioration of renal hypoxia.