Photopolymerizable poly(ethylene glycol) (PEG) hydrogels are a promising platform for chondrocyte encapsulation and cartilage tissue engineering. This study demonstrates that during the process of encapsulation, chondrocytes alter the formation of PEG hydrogels leading to a reduction in the bulk and local hydrogel crosslink density. Freshly isolated chondrocytes were shown to interact with hydrogel precursors, in part through thiol-mediated events between dithiol crosslinkers and cell surface free thiols, depleting crosslinker concentration and causing a reduction in the bulk hydrogel crosslink density. This effect was more pronounced with increasing cell density at the time of encapsulation. Encapsulation of chondrocytes in fluorescently labeled hydrogels exhibited a gradient in hydrogel density around the cell, which was abrogated by treatment of the cells with the antioxidant estradiol prior to encapsulation. This led to spatial variations in the degradation behavior of a hydrolytically degradable PEG hydrogel, creating regions devoid of hydrogel surrounding cells. Collectively, findings from this study indicate that the antioxidant defense mechanisms in chondrocytes alter the resultant properties of PEG hydrogels formed by free-radical polymerizations. These interactions will have a significant impact on tissue engineering, affecting the local microenvironment around cells and how tissue grows within the hydrogels.