Studies on diabetes have long been hampered by a lack of authentic disease models that, ideally, should be unlimited and able to recapitulate the abnormalities involved in the development, structure, and function of human pancreatic islets under pathological conditions. Stem cell-based islet organoids faithfully recapitulate islet development in vitro and provide large amounts of three-dimensional functional islet biomimetic materials with a morphological structure and cellular composition similar to those of native islets. Thus, islet organoids hold great promise for modeling islet development and function, deciphering the mechanisms underlying the onset of diabetes, providing an in vitro human organ model for infection of viruses such as SARS-CoV-2, and contributing to drug screening and autologous islet transplantation. However, the currently established islet organoids are generally immature compared with native islets, and further efforts should be made to improve the heterogeneity and functionality of islet organoids, making it an authentic and informative disease model for diabetes. Here, we review the advances and challenges in the generation of islet organoids, focusing on human pluripotent stem cell-derived islet organoids, and the potential applications of islet organoids as disease models and regenerative therapies for diabetes.