Diabetes mellitus type 1 (T1DM) and type 2 (T2DM) are common diseases. To date, it is widely accepted that all forms of DM lead to the loss of beta cells. Therefore, to avoid the debilitating comorbidities when glycemic control cannot be fully achieved, some would argue that beta cell replacement is the only way to cure the disease. Due to organ donor shortage, other cell sources for beta cell replacement strategies have to be employed. Pluripotent stem cells, including embryonic stem (ES) and induced pluripotent stem (iPS) cells offer a valuable alternative to provide the necessary cells to substitute organ transplants but also to serve as a model to study the onset and progression of the disease, resulting in better treatment regimens. This review will summarize recent progress in the establishment of pluripotent stem cells, their differentiation into the pancreatic lineage with a focus on two-dimensional (2D) and three-dimensional (3D) differentiation settings, the special role of iPS cells in the analysis of genetic predispositions to diabetes, and techniques that help to move current approaches to clinical applications. Particular attention, however, is also given to the long-term challenges that have to be addressed before ES or iPS cell-based therapies will become a broadly accepted treatment option.