Recently bone graft substitutes using bone morphogenetic proteins (BMPs) have been heralded as potential alternatives to traditional bone reconstruction procedures. BMP-based products, however, are associated with significant and potentially life-threatening side effects when used in the head and neck region and furthermore, are exorbitantly priced. Oxysterols, products of cholesterol oxidation, represent a class of molecules that are favorable alternatives or adjuncts to BMP therapy due to their low side effect profile and cost. In order to establish the optimal clinical utility of oxysterol, an optimal scaffold must be developed, one that allows the release of oxysterol in a sustained and efficient manner. In this study, we prepare a clinically applicable bone graft substitute engineered for the optimal release of oxysterol. We first solubilized oxysterol in water by making use of polymeric micelles using L-lactic acid oligomer (LAo) grafted gelatin. Then, the water-solubilized oxysterol was incorporated into a biodegradable hydrogel that was enzymatically degraded intracorporeally. In this manner, oxysterol could be released from the hydrogel in a degradation-driven manner. The water-solubilized oxysterol incorporated biodegradable hydrogel was implanted into rat calvarial defects and induced successful bone regeneration. The innovative significance of this study lies in the development of a bone graft substitute that couples the osteogenic activity of oxysterol with a scaffold designed for optimized oxysterol release kinetics, all of which lead to better repair of bone defects. (C) 2014 Elsevier Ltd. All rights reserved.