Healing articular cartilage remains a significant clinical challenge because of its limited self-healing capacity. While delivery of autologous chondrocytes to cartilage defects has received growing interest, combining cell-based therapies with scaffolds that capture aspects of native tissue and promote cell-mediated remodeling could improve outcomes. Currently, scaffold-based therapies with encapsulated chondrocytes permit matrix production; however, resorption of the scaffold does not match the rate of production by cells leading to generally low ECM outputs. Here, a PEG norbornene hydrogel was functionalized with thiolated TGF-β1 and crosslinked by an MMP-degradable peptide. Chondrocytes were co-encapsulated with a smaller population of MSCs, with the goal of stimulating matrix production and increasing bulk mechanical properties of the scaffold. Interestingly, the co-encapsulated cells cleaved the MMP-degradable target sequence more readily than either cell population alone. Relative to non-degradable gels, cellularly-degraded materials showed significantly increased GAG and collagen deposition over just 14 days of culture, while maintaining high levels of viability and producing a more diffuse matrix. These results indicate the potential of an enzymatically-degradable, peptide-functionalized PEG hydrogel to locally influence and promote cartilage matrix production over a short period. Scaffolds that permit cell-mediated remodeling may be useful in designing treatment options for cartilage tissue engineering applications.