The move puts an end to a monthslong transfer saga, with Chelsea manager Mauricio Pochettino having labelled Caicedo as his No. 1 target this summer and the club's opening bids being rejected by Brighton.
However, Chelsea faced competition for his signature. On Friday, Liverpool broke ground and agreed a £111m fee with Brighton -- the first club to do so -- only for the midfielder to reject a move to Anfield and instead indicate his desire to join Chelsea.
Chelsea upped their offer, with sources telling ESPN the club agreed a deal on Sunday that includes an initial £100m in guaranteed payments with a further £15m in add-ons. Around half of the add-ons are described as easily achievable with the other half considerably harder to trigger.
"I am so happy to join Chelsea! I am so excited to be here at this big club and I didn't have to think twice when Chelsea called me, I just knew I wanted to sign for the club," Caicedo said in a statement after signing an eight-year contract at Stamford Bridge.
"It's a dream come true to be here and I can't wait to get started with the team."
Caicedo enjoyed a successful spell at Brighton after joining in February 2021 from Ecuadorian side Independiente del Valle. He spent the first half of the following season on loan with Belgian outfit Beerschot.
He went on to make 53 appearances in all competitions for Brighton and becomes the latest club personnel to go to Chelsea, following in the footsteps of Marc Cucurella and Robert Sánchez as well as former manager Graham Potter.
Chelsea's coup in signing Caicedo means they have spent over $1 billion in player transfer fees since the new ownership led by Todd Boehly and Clearlake Capital completed their takeover of the club in May 2022.
Information from Reuters was included in this report.