Bailey, who had $10 million remaining on his contract, suffered through an injury-plagued 2013 campaign. He played in just five regular-season games, but returned to play in all three postseason games, including the Super Bowl.
He finished the regular season with 14 total tackles and no interceptions, marking the first time in his 15-year career he failed to pick off a pass.
"This was a difficult decision for our team with everything that Champ Bailey has meant to the Denver Broncos and this community over the last 10 years," said Broncos executive vice president of football operations/general manager John Elway. "Without question, he's among the best cornerbacks to ever play the game and one of the finest players in the history of the Broncos. You couldn't ask for more in a player than what Champ brought to this team. His combination of elite talent, class, leadership and competitiveness made him one of the all-time greats."
Bailey, 35, spent 10 seasons with the Broncos, picking of 34 passes. During his 15-year career, the 12-time Pro Bowl selection has 52 interceptions.
He was drafted by the Redskins with the seventh overall pick in 1999. Prior to the 2004 season, Bailey was traded to Denver.
According to the Denver Post, the two sides agreed to the release on Wednesday as the Broncos were not interested in reworking the deal to keep Bailey with the team.