Microencapsulation of cells or tissue fragments represents a potentially effective method to prevent graft rejection in allotransplantation and xenotransplantation without the need of immunosuppression, but the functional survival of all trial grafts is still limited. Usually, graft failure is mainly interpreted as the consequence of the progressive fibrotic overgrowth of capsules, the insufficient supply of oxygen and nutrition to the encapsulated graft, and the dysfunction of the encapsulated graft induced by small proinflammatory factors. These detrimental factors are interrelatd with the microcapsules, the implanted graft, and the transplantation site. This article reviews and summarizes the advance and the limitation of microencapsulated grafts transplantation in the above-mentioned aspects.