In the process of generating organoids, basement membrane extracts or Matrigel are often used to encapsulate cells but they are poorly defined and contribute to reproducibility issues. While defined hydrogels are increasingly used for organoid culture, the effects of replacing Matrigel with a defined hydrogel on neural progenitor growth, neural differentiation, and maturation within organoids are not well‐explored. In this study, the use of alginate hydrogels as a Matrigel substitute in spinal cord organoid generation is explored. It is found that alginate encapsulation reduces organoid size variability by preventing organoid aggregation. Importantly, alginate supports neurogenesis and gliogenesis of the spinal cord organoids at a similar efficiency to Matrigel, with mature myelinated neurons observed by day 120. Furthermore, using alginate leads to lower expression of non‐spinal markers such as FOXA2, suggesting better control over neural fate specification. To demonstrate the feasibility of using alginate‐based organoid cultures as disease models, an isogenic pair of induced pluripotent stem cells discordant for the ALS‐causing mutation TDP43G298S is used, where increased TDP43 mislocalization in the mutant organoids is observed. This study shows that alginate is an ideal substitute for Matrigel for spinal cord organoid derivation, especially when a xeno‐free and fully defined 3D culture condition is desired.