Polymer hydrogels are widely used as cell scaffolds for biomedical applications. Although the biochemical and biophysical properties of hydrogels have been investigated extensively, little attention has been paid to their potential photonic functionalities. Here, we report cell-integrated polyethylene glycol-based hydrogels for in vivo optical-sensing and therapy applications. Hydrogel patches containing cells were implanted in awake, freely moving mice for several days and shown to offer long-term transparency, biocompatibility, cell viability and light-guiding properties (loss of <1 dB cm−1). Using optogenetic, glucagon-like peptide-1 secreting cells, we conducted light-controlled therapy using the hydrogel in a mouse model with diabetes and obtained improved glucose homeostasis. Furthermore, real-time optical readout of encapsulated heat-shock-protein-coupled fluorescent reporter cells made it possible to measure the nanotoxicity of cadmium-based bare and shelled quantum dots (CdTe; CdSe/ZnS) in vivo.