Cell-based therapy is emerging as a promising strategy for treating a wide range of human diseases, such as diabetes, blood disorders, acute liver failure, spinal cord injury, and several types of cancer. Pancreatic islets, blood cells, hepatocytes, and stem cells are among the many cell types currently used for this strategy. The encapsulation of these "therapeutic" cells is under intense investigation to not only prevent immune rejection but also provide a controlled and supportive environment so they can function effectively. Some of the advanced encapsulation systems provide active agents to the cells and enable a complete retrieval of the graft in the case of an adverse body reaction. Here, we review various encapsulation strategies developed in academic and industrial settings, including the state-of-the-art technologies in advanced preclinical phases as well as those undergoing clinical trials, and assess their advantages and challenges. We also emphasize the importance of stimulus-responsive encapsulated cell systems that provide a "smart and live" therapeutic delivery to overcome barriers in cell transplantation as well as their use in patients.