Insulin-dependent diabetes in patients with Wolfram syndrome (WS; OMIM 222300) has been linked to endoplasmic reticulum (ER) stress caused by WFS1 gene mutations. However, the pathological process of ER stress–associated β cell failure remains to be fully elucidated. Our results indicate loss of β cell lineage and subsequent dedifferentiation as the mechanisms underlying functional and mass deficits in WS. An immunohistochemical analysis of human pancreatic sections from deceased individuals with WS revealed a near-complete loss of β cells and subsequent decrease in α cells, suggesting loss of endocrine function. Wfs1 -deficient mice displayed dysfunction, gradual loss, and dedifferentiation of β cells, leading to permanent hyperglycemia. Impairment of the β cell lineage was observed after weaning, leading to the mixed phenotype of insulin- and glucagon-producing cells in a subset of the lineage-traced β cells. Islets of Wfs1 -deficient mice increased the number of dedifferentiated cells that maintained general endocrine features but were no longer reactive with antisera against pancreatic hormones. Mechanistically, Wfs1 -null islets had a lower adenosine triphosphate content and impaired oxidative glycolysis, although mitochondrial oxidative function was maintained. The functional and metabolic alterations of WS β cells were recovered by deletion of thioredoxin-interacting protein (Txnip), an ER stress–induced protein up-regulated in Wfs1 deficiency. Txnip deletion preserved functional β cells and prevented diabetes progression in Wfs1 -deficient mice. Together, this study deciphered pathological mechanisms of β cell dedifferentiation in β cell failure and has implications for Txnip inhibition in WS therapy.