Canine mesenchymal stem cells (cMSCs) have potential applications for regenerative therapy, including the generation of insulin-producing cells (IPCs) for studying and treating diabetes. In this study, we established a useful protocol for generating IPCs from canine adipose mesenchymal stem cells (cAD-MSCs). Subsequently, in vitro preservation of pluronic F127-coated alginate (ALGPA)-encapsulated cAD-MSC-derived IPCs was performed to verify ready-to-use IPCs. IPCs were induced from cAD-MSCs with the modulated three-stepwise protocol. The first step of definitive endoderm (DE) induction showed that the cooperation of Chir99021 and Activin A created the effective production of Sox17-expressed DE cells. The second step for pancreatic endocrine (PE) progenitor induction from DE indicated that the treatment with taurine, retinoic acid, FGF2, EGF, TGFβ inhibitor, dorsomorphin, nicotinamide, and DAPT showed the significant upregulation of the pancreatic endocrine precursor markers Pdx1 and Ngn3. The last step of IPC production, the combination of taurine, nicotinamide, Glp-1, forskolin, PI3K inhibitor, and TGFβ inhibitor, yielded efficiently functional IPCs from PE precursors. Afterward, the maintenance of ALGPA-encapsulated cAD-MSC-derived IPCs with VSCBIC-1, a specialized medium, enhanced IPC properties. Conclusion, the modulated three-stepwise protocol generates the functional IPCs. Together, the encapsulation of cAD-MSC-derived IPCs and the cultivation with VSCBIC-1 enrich the maturation of generated IPCs.