Cell encapsulation is a method of encasing cells in a semipermeable matrix that provides a permeable gradient for the passage of oxygen and nutrients, but effectively blocks immune-regulating cells from reaching the graft, preventing rejection. This concept has been described as early as the 1930s, but it has exhibited substantial achievements over the last decade. Several advances in encapsulation engineering, chemical purification, applications, and cell viability promise to make this a revolutionary technology. Several obstacles still need to be overcome before this process becomes a reality, including developing a reliable source of islets or insulin-producing cells, determining the ideal biomaterial to promote graft function, reducing the host response to the encapsulation device, and ultimately a streamlined, scaled-up process for industry to be able to efficiently and safely produce encapsulated cells for clinical use. This article provides a comprehensive review of cell encapsulation of islets for the treatment of type 1 diabetes, including a historical perspective, current research findings, and future studies.