Adipose-derived mesenchymal stromal cells (Ad-MSCs) are a promising tool for articular cartilage repair and regeneration. However, the terminal hypertrophic differentiation of Ad-MSC-derived cartilage is a critical barrier during hyaline cartilage regeneration. In this study, we investigated the role of matrilin-3 in preventing Ad-MSC-derived chondrocyte hypertrophy in vitro and in an osteoarthritis (OA) destabilization of the medial meniscus (DMM) model. Methacrylated hyaluron (MAHA) (1%) was used to encapsulate and make scaffolds containing Ad-MSCs and matrilin-3. Subsequently, the encapsulated cells in the scaffolds were differentiated in chondrogenic medium (TGF-β, 1–14 days) and thyroid hormone hypertrophic medium (T3, 15–28 days). The presence of matrilin-3 with Ad-MSCs in the MAHA scaffold significantly increased the chondrogenic marker and decreased the hypertrophy marker mRNA and protein expression. Furthermore, matrilin-3 significantly modified the expression of TGF-β2, BMP-2, and BMP-4. Next, we prepared the OA model and transplanted Ad-MSCs primed with matrilin-3, either as a single-cell suspension or in spheroid form. Safranin-O staining and the OA score suggested that the regenerated cartilage morphology in the matrilin-3-primed Ad-MSC spheroids was similar to the positive control. Furthermore, matrilin-3-primed Ad-MSC spheroids prevented subchondral bone sclerosis in the mouse model. Here, we show that matrilin-3 plays a major role in modulating Ad-MSCs’ therapeutic effect on cartilage regeneration and hypertrophy suppression.