Type 1 diabetes is an autoimmune disorder in which the immune system attacks and destroys insulin-producing islet cells of the pancreas. Although islet transplantation has proved to be successful for some patients with type 1 diabetes, its widespread use is limited by islet donor shortage and the requirement for lifelong immunosuppression. An encapsulation strategy that can prevent the rejection of xenogeneic islets or of stem cell-derived allogeneic islets can potentially eliminate both of these barriers. Although encapsulation technology has met several challenges, the convergence of expertise in materials, nanotechnology, stem cell biology and immunology is allowing us to get closer to the goal of encapsulated islet cell therapy for humans.