In the current proposal, we studied critical components of the joint-forming “niche” required for the long-term maintenance of cartilage-committed progenitors capable of differentiation into articular chondrocytes. This question has central importance in overcoming the significant obstacles inhibiting the use of human pluripotent stem cells (hPSC) to generate articular cartilage for clinical transplantation. Detailed assessment of hPSC-derived chondrocytes from in vivo showed robust generation of functional cartilage tissue in the rat joint. Moreover, implanted hPSC-derived chondrocytes not only repaired cartilage tissue at the site of defect, but also clearly showed disease-modifying activity by preventing articular cartilage degeneration in the areas adjacent to the site of injury. However, all these effects were only observed hPSC-derived chondrocytes were generated and matured for a critical peiod of time either in the presence of specific mesenchymal cells called synovial pericytes, or in the presence of leukemia inhibitory factor (LIF), a secreted factor produced by pericytes. In summary, the LIF signaling pathway is as an important regulator of the differentiation state of chondrocytes. Addition of LIF to the last stage of pluripotent stem cell differentiation is sufficient for the generation of functional articular chondrocytes. The addition of LIF to the last stage of pluripotent stem cell differentiation to chondrocytes is sufficient for the generation of functional articular chondrocytes in vivo.