While the link between obesity and type 2 diabetes is clear on an epidemiological level, the underlying mechanism linking these two common disorders is not as clearly understood. One hypothesis linking obesity to type 2 diabetes is the adipose tissue expandability hypothesis. The adipose tissue expandability hypothesis states that a failure in the capacity for adipose tissue expansion, rather than obesity per se is the key factor linking positive energy balance and type 2 diabetes. All individuals possess a maximum capacity for adipose expansion which is determined by both genetic and environmental factors. Many separate biological processes have been implicated in mediating a limit on adipose tissue expansion, including the production of adipokines, reduction in the formation of new adipocytes, local inflammation within the adipose tissue, angiogenesis and extracellular matrix remodelling. Once the adipose tissue expansion limit is reached, adipose tissue ceases to store energy efficiently and lipids begin to accumulate in other tissues. Ectopic lipid accumulation in non-adipocyte cells causes lipotoxic insults including insulin resistance, apoptosis and inflammation.