Over a thousand combinations of polyanions and polycations were tested to search for new polymer candidates that would be suitable for encapsulation of living cells. The combination of sodium alginate, cellulose sulfate, poly (methylene-co-guanidine) hydrochloride, calcium chloride, and sodium chloride was most promising. In parallel, a novel multiloop chamber reactor was developed to control the time of complex formation and to negate gravitational effects such as pancreatic islet sedimentation and droplet deformation during the encapsulation process. Encapsulated rat islets demonstrated glucose-stimulated insulin secretion in vitro, and reversed diabetes in mice. This new capsule formulation and encapsulation system allows independent adjustments of capsule size, wall thickness, mechanical strength, and permeability, which may offer distinct advantages for immunoisolating cells.