In all living systems, the genome is replicated by proteins that are encoded within the genome itself. This universal reaction is essential to allow the system to evolve. Here, we have constructed a simplified system involving encapsulated macromolecules termed a "self-encoding system", in which the genetic information is replicated by self-encoded replicase in liposomes. That is, the universal reaction was reconstituted within a microcompartment bound by a lipid bilayer. The system was assembled by using one template RNA sequence as the information molecule and an in vitro translation system reconstituted from purified translation factors as the machinery for decoding the information. In this system, the catalytic subunit of Qbeta replicase is synthesized from the template RNA that encodes the protein. The replicase then replicates the template RNA that was used for its production. This in-liposome self-encoding system is one of the simplest such systems available; it consists of only 144 gene products, while the information and the function for its replication are encoded on different molecules and are compartmentalized into the microenvironment for evolvability.