Matrix remodeling of cells is highly regulated by proteases and their inhibitors. Nevertheless, how would the chondrogenesis of mesenchymal stem cells (MSCs) be affected, when the balance of the matrix remodeling is disturbed by inhibiting matrix proteases, is incompletely known. Using a previously developed collagen microencapsulation platform, we investigated whether exposing chondrogenically differentiating MSCs to intracellular and extracellular protease inhibitors will affect the extracellular matrix remodeling and hence the outcomes of chondrogenesis. Results showed that inhibition of matrix proteases particularly the extracellular ones favors the phenotype of fibrocartilage rather than hyaline cartilage in chondrogenically differentiating hMSCs by upregulating type I collagen protein deposition and type II collagen gene expression without significantly altering the hypertrophic markers at gene level. This study suggests the potential of manipulating extracellular proteases to alter the outcomes of hMSC chondrogenesis, contributing to future development of differentiation protocols for fibrocartilage tissues for intervertebral disc and meniscus tissue engineering.