Human trials have demonstrated the feasibility of alginate-encapsulated islet cells for the treatment of type 1 diabetes. Encapsulated islets can be protected from the host's immune system and remain viable and functional following transplantation. However, the long-term success of these therapies requires that alginate microcapsules maintain their immunoprotective capacity and stability in vivo for sustained periods. In part, as a consequence of different encapsulation strategies, islet encapsulation studies have produced inconsistent results in regard to graft functioning time, stability, and overall metabolic benefits. Alginate composition (proportion of M- and G-blocks), alginate purity, the cross-linking ions (calcium or barium), and the presence or absence of additional polymer coating layers influence the success of cell encapsulation. This review summarizes the outcomes of long-term studies of alginate-encapsulated islet transplants in animals and humans and provides a critical discussion of the graft failure mechanisms, including issues with graft biocompatibility, transplantation site, and integrity of the encapsulated islet grafts. Strategies to improve the mechanical stability of alginate capsules and methods for monitoring graft survival and function in vivo are presented.