Tumor-specific CD8⁺T cells are exposed to persistent antigenic stimulation which induces a dysfunctional state called “exhaustion.” Though functioning to limit damage caused by immune response, T cell exhaustion leads to attenuated effector function whereby cytotoxic CD8⁺T cells fail to control tumor progression in the late stage. This pathway is a dynamic process from activation to “progenitor exhaustion” through to “terminally exhaustion” with distinct properties. With the rapid development of immunotherapy via enhancing T cell function, new studies are dissecting the mechanisms and identifying specific biomarkers of dynamic differentiation during the process of exhaustion. Further, although immune checkpoint inhibitors (ICIs) have achieved great success in clinical practice, most patients still show limited efficacy to ICIs. The expansion and differentiation of progenitor exhausted T cells explained the success of ICIs while the depletion of the progenitor T cell pool and the transient effector function of terminally exhausted T cells accounted for the failure of immune monotherapy in the context of exorbitant tumor burden. Thus, combination strategies are urgent to be utilized based on the reduction of tumor burden or the expansion of the progenitor T cell pool. In this review, we aim to introduce the concept of homeostasis of the activated and exhausted status of CD8⁺T cells in the tumor immune microenvironment, and present recent findings on dynamic differentiation process during T cell exhaustion and the implications for combination strategies in immune therapy.