Diabetes mellitus, a significant global public health challenge, severely impacts human health worldwide. The organoid, an innovative in vitro three-dimensional (3D) culture model, closely mimics tissues or organs in vivo. Insulin-secreting islet organoid, derived from stem cells induced in vitro with 3D structures, has emerged as a potential alternative for islet transplantation and as a possible disease model that mirrors the human body’s in vivo environment, eliminating species difference. This technology has gained considerable attention for its potential in diabetes treatment. Despite advances, the process of stem cell differentiation into islet organoid and its cultivation demonstrates deficiencies, prompting ongoing efforts to develop more efficient differentiation protocols and 3D biomimetic materials. At present, the constructed islet organoid exhibit limitations in their composition, structure, and functionality when compared to natural islets. Consequently, further research is imperative to achieve a multi-tissue system composition and improved insulin secretion functionality in islet organoid, while addressing transplantation-related safety concerns, such as tumorigenicity, immune rejection, infection, and thrombosis. This review delves into the methodologies and strategies for constructing the islet organoid, its application in diabetes treatment, and the pivotal scientific challenges within organoid research, offering fresh perspectives for a deeper understanding of diabetes pathogenesis and the development of therapeutic interventions.