The leafy seadragon certainly is among evolution's most "beautiful and wonderful" species aptly named for its extraordinary camouflage mimicking its coastal seaweed habitat. However, limited information is known about the genetic basis of its phenotypes and conspicuous camouflage. Here, we revealed genomic signatures of rapid evolution and positive selection in core genes related to its camouflage, which allowed us to predict population dynamics for this species. Comparative genomic analysis revealed that seadragons have the smallest olfactory repertoires among all ray-finned fishes, suggesting adaptations to the highly specialized habitat. Other positively selected and rapidly evolving genes that serve in bone development and coloration are highly expressed in the leaf-like appendages, supporting a recent adaptive shift in camouflage appendage formation. Knock-out of bmp6 results in dysplastic intermuscular bones with a significantly reduced number in zebrafish, implying its important function in bone formation. Global climate change-induced loss of seagrass beds now severely threatens the continued existence of this enigmatic species. The leafy seadragon has a historically small population size likely due to its specific habitat requirements that further exacerbate its vulnerability to climate change. Therefore, taking climate change-induced range shifts into account while developing future protection strategies.