This review focuses on recent engineering advances in islet encapsulation technologies. β cell replacement therapy in the form of allogeneic naked islet transplantation has become an established treatment for type 1 diabetes mellitus (T1DM). However, some limitations still impact the broad applicability and long-term efficacy of the procedure, including shortage of donor islets, the need for lifelong immunosuppression, and restriction to the most vulnerable patients. Islet encapsulation promises to overcome these constraints by providing a selectively permeable barrier between host and therapeutic tissues. While tremendous progress has been made and the clearing of key translational hurdles appears to be near, many challenges need to be addressed before this technology platform can enter the clinic. Here, we summarize the research in this area and seek to identify the outstanding challenges in translating islet encapsulation technology to human patients.