We describe the dynamics of 3-10 nm gold nanoparticles encapsulated by ∼30 nm liquid nanodroplets on a flat solid substrate and find that the diffusive motion of these nanoparticles is damped due to strong interactions with the substrate. Such damped dynamics enabled us to obtain time-resolved observations of encapsulated nanoparticles coalescing into larger particles. Techniques described here serve as a platform to study chemical and physical dynamics under highly confined conditions.