The method to benifit tissue engineering of adipose-derived stem cells (ADSCs) to cartilage has been an objective of intense research in treating increasing cartilage-related disease. In this study, whether hypoxic expansion would enhance the proliferation and in vitro chondrogenic differentiation of ADSCs was studied, and then hypoxic expansion was applied to reduce cartilage damage in a rat model in vivo. Hypoxic expansion increased the proliferation and decreased the expression of aging-related genes, including p16, p21, and p53, of human ADSCs in comparison with normoxic expansion. In addition, the γH2AX expression was reduced in the hypoxic ADSCs. The chondrogenic markers were enhanced in the hypoxic ADSC differentiated chondrogenic pellets, including SOX9 on day 7 and gene expressions of COL 2 and COL 10 on day 21. To determine the in vitro chondrogenic differentiation potential of ADSCs, ADSC differentiated 21-day chondrogenic pellets were stained by Alcian blue staining and the immunostaining of COL 2 and COL 10, the results of which confirmed the enhancement of differentiation potential after the hypoxic expansion. Moreover, cartilage injury in a rat model was reduced by hypoxic ADSC treatment that was determined by histological and immunohistochemical staining detections. The effects of hypoxic expansion of ADSCs and bone marrow-derived stem cells (BMSCs) on chondrogenic differentiation potential were also compared. Smaller sizes were presented in the in vitro hypoxic BMSC differentiated chondrogenic pellets, whereas the chondrogenic marker expressions were significantly higher than those of the hypoxic ADSCs. However, there was no significant difference between the treatments of the hypoxic ADSCs and BMSCs in the cartilage injury in vivo. In conclusion, hypoxic expansion increases the chondrogenic differentiation potential of ADSCs and BMSCs in vitro and enhances them to reduce cartilage damage in vivo. Although the hypoxic BMSCs showed compact chondrogenic pellet formation and higher potential of chondrogenesis, the easy access and large resources of ADSCs still uplifted the application.