Alginate-based hydrogels are extensively used matrices for cell encapsulation, but they need to be modified to recapitulate chemical, microstructural, and mechanical properties of the native extracellular matrix. Like other cell types, mesenchymal stem cells exhibit rounded and clustered morphologies when they are embedded in alginate hydrogels. In this study, we use covalently cross-linked oxidized alginate-gelatin hydrogels to encapsulate human adipose-derived stem cells in order to investigate cell growth, viability, and morphology during osteogenic differentiation taking advantage of the different physicochemical properties of this modified alginate-based hydrogel in comparison to those of the pristine alginate hydrogel. We investigate the effect of hydrogel compositions on stem cell behavior in 3D. Higher viability and the spreading morphology of encapsulated cells with interconnected networks were observed in high gelatin containing compositions. More filopodial protrusions from multicellular nodules were noticed during osteogenic differentiation in the hydrogels having a high amount of gelatin, confirming their suitability for cell encapsulation and bone tissue engineering applications. © 2017 American Chemical Society.