Stem cell encapsulation has become widely used in the bone regeneration field. The challenging aspect of this method is the timing of cell differentiation and cell release into the desired bone defect area. In this study, we used the endogenous antiangiogenic protein, pigment epithelium-derived factor (PEDF), as an osteogenic supplement to differentiate mesenchymal stem cells (MSCs) to osteoblast. In stem cell monolayer cell culture and MSCs encapsulation into alginate microbeads. We show that PEDF has osteogenic differentiation potential. We also observed that alginate microbeads containing PEDF degraded significantly in compression to alginate microbeads signifying that PEDF differentiates MSCs into osteoblasts. Thus, stem cells encapsulated with PEDF within alginate hydrogel have shown promise in their capacity to release stem cells with guaranteed osteoblast differentiation. This could be useful for bone tissue engineering in future.