"By almost every measure, America is a better, stronger place" than it was eight years ago when he took office, he told thousands of supporters.
But he warned "democracy is threatened whenever we take it for granted".
He implored Americans of all backgrounds to consider things from each other's point of view, saying "we have to pay attention and listen".
The country's first black president, now 55, was first elected in 2008 on a message of hope and change.
His successor, Donald Trump, has vowed to undo some of Mr Obama's signature policies. He will be sworn into office on 20 January.
Raucous chants of "four more years" from the crowd were brushed aside by the president. "I can't do that," he said with a smile. US presidents are limited to two terms by the constitution.
"No, no, no, no no," he said, when the crowd booed the prospect of Mr Trump replacing him.
Striking an upbeat tone, Mr Obama said that the peaceful transfer of power between presidents was a "hallmark" of American democracy.
But, he outlined three threats to American democracy - economic inequality, racial divisions and the retreat of different segments of society into "bubbles", where opinions are not based on "some common baseline of facts".
"If you're tired of arguing with strangers on the internet, try to talk with one in real life," he said to laughter and applause.
In his closing remarks he said he had one final request for Americans as president: "I am asking you to believe. Not in my ability to bring about change - but in yours."
Returning to Chicago, where he first declared victory in 2008, Mr Obama delivered a mostly positive message to Americans after a divisive election campaign which saw Mr Trump defeat Democrat Hillary Clinton.
As he leaves the Oval Office, President Obama is viewed favourably by 57% of Americans, according to an Associated Press-NORC Center for Public Affairs Research poll, a similar level to Bill Clinton when he left office.