Transplantation of alginate-encapsulated islets has the potential to treat patients suffering from type I diabetes, a condition characterized by an autoimmune attack against insulin-secreting beta cells. However, there are multiple immunological challenges associated with this procedure, all of which must be adequately addressed prior to translation from trials in small animal and nonhuman primate models to human clinical trials. Principal threats to graft viability include immune-mediated destruction triggered by immunogenic alginate impurities, unfavorable polymer composition and surface characteristics, and release of membrane-permeable antigens, as well as damage associated molecular patterns (DAMPs) by the encapsulated islets themselves. The lack of standardization of significant parameters of bioencapsulation device design and manufacture (i.e., purification protocols, surface-modification grafting techniques, alginate composition modifications) between labs is yet another obstacle that must be overcome before a clinically effective and applicable protocol for encapsulating islets can be implemented. Nonetheless, substantial progress is being made, as is evident from prolonged graft survival times and improved protection from immune-mediated graft destruction reported by various research groups, but also with regard to discoveries of specific pathways involved in explaining observed outcomes. Progress in the latter is essential for a comprehensive understanding of the mechanisms responsible for the varying levels of immunogenicity of certain alginate devices. Successful translation of encapsulated islet transplantation from in vitro and animal model testing to human clinical trials hinges on application of this knowledge of the pathways and interactions which comprise immune-mediated rejection. Thus, this review not only focuses on the different factors contributing to provocation of the immune reaction by encapsulated islets, but also on the defining characteristics of the response itself.