The repair of articular cartilage defects remains a significant challenge in orthopedic medicine. Hydrogels, three-dimensional polymer networks swollen in water, offer a unique opportunity to generate a functional cartilage substitute. Hydrogels can exhibit similar mechanical, swelling, and lubricating behavior to articular cartilage, and promote the chondrogenic phenotype by encapsulated cells. Hydrogels have been prepared from naturally derived and synthetic polymers, as cell-free implants and as tissue engineering scaffolds, and with controlled degradation profiles and release of stimulatory growth factors. Using hydrogels, cartilage tissue has been engineered in vitro that has similar mechanical properties to native cartilage. This review summarizes the advancements that have been made in determining the potential of hydrogels to replace damaged cartilage or support new tissue formation as a function of specific design parameters, such as the type of polymer, degradation profile, mechanical properties and loading regimen, source of cells, cell-seeding density, controlled release of growth factors, and strategies to cause integration with surrounding tissue. Some key challenges for clinical translation remain, including limited information on the mechanical properties of hydrogel implants or engineered tissue that are necessary to restore joint function, and the lack of emphasis on the ability of an implant to integrate in a stable way with the surrounding tissue. Future studies should address the factors that affect these issues, while using clinically relevant cell sources and rigorous models of repair.