Encapsulation of pancreatic islets allows for transplantion in the absence of immunosuppression. The technology is based on the principle that transplanted tissue is protected for the host immune system by an artificial membrane. Encapsulation offers a solution to the shortage of donors in clinical islet transplantation because it allows animal islets or insulin-producing cells engineered from stem cells to be used. During the past two decades three major approaches to encapsulation have been studied. These include intravascular macrocapsules, which are anastomosed to the vascular system as AV shunt; extravascular macrocapsules, which are mostly diffusion chambers transplanted at different sites; and extravascular microcapsules transplanted in the peritoneal cavity. The advantages and pitfalls of these three approaches are discussed and compared in the light of their applicability to clinical islet transplantation. All systems have been shown to be successful in preclinical studies but not all approaches meet the technical or physiological requirements for application in human beings. The extravascular approach has advantages over the intravascular because since it is associated with less complications such as thrombosis and infection. Microcapsules, due to their spatial characteristics, have a better diffusion capacity than macrocapsules. Recent progress in biocompatibility of microcapsules has brought this technology close to clinical application. Critical issues such as limitations in the functional performance and survival are being discussed. The latest results show that both issues can be solved by the transplantation of microencapsulated islets close to blood vessels in prevascularized solid supports.