The Ecuadorian penned an eight-year deal when he joined from Brighton & Hove Albion in 2023 for a then British record transfer fee of 115 million pounds ($156.27 million).
"I believe in this team, this club and I know we're going in the right direction. We've only just begun together," Caicedo said in a statement. "I want to win more trophies with Chelsea and give everything for this club and for the fans.
"We have enjoyed some great times together already and my dream is to become a Chelsea legend, and I will work as hard as possible to make that happen," he added.
Caicedo initially struggled to replicate his success with Brighton at Chelsea under then manager Mauricio Pochettino, but Enzo Maresca's arrival in 2024 marked a turning point.
The Italian deployed Caicedo as a central midfielder, tasked with shielding the defence and dictating tempo.
After Chelsea won the Conference League and Club World Cup, Caicedo won the West London club's player of the year and players' player of the year awards.
Caicedo has become one of Chelsea's more reliable players, making more than 40 appearances in all competitions this season, while he has also worn the captain's armband on occasion.
