Polycystin-1 (PC-1) and PC-2 form a heteromeric ion channel complex that is abundantly expressed in primary cilia of renal epithelial cells. This complex functions as a non-selective cation channel, and mutations within the polycystin complex cause autosomal dominant polycystic kidney disease (ADPKD). The spatial and temporal regulation of the polycystin complex within the ciliary membrane remains poorly understood. Using both whole-cell and ciliary patch-clamp recordings, we identify a cilia-enriched oxysterol, 7β,27-dihydroxycholesterol (DHC), that serves as a necessary activator of the polycystin complex. We further identify an oxysterol-binding pocket within PC-2 and showed that mutations within this binding pocket disrupt 7β,27-DHC-dependent polycystin activation. Pharmacologic and genetic inhibition of oxysterol synthesis reduces channel activity in primary cilia. In summary, our findings reveal a regulator of the polycystin complex. This oxysterol-binding pocket in PC-2 may provide a specific target for potential ADPKD therapeutics.