Uncoupling protein (UCP) 3 (UCP3) is a mitochondrial anion carrier protein with highly selective expression in skeletal muscle. Despite a great deal of interest, to date neither its molecular mechanism nor its biochemical and physiological functions are well understood. Based on its high degree of homology to the original UCP (UCP I), early studies examined a role for UCP3 in thermogenesis. However, evidence for such a function is lacking. Recent studies have focused on two distinct, but not mutually exclusive, hypotheses: 1) UCP3 mitigates reactive oxygen species (ROS) production, and 2) UCP3 is somehow involved in fatty acid (FA) translocation. While supportive evidence exists for both hypotheses, the interpretation of the corresponding evidence has created some controversy. Mechanistic studies examining mitigated ROS production have been largely conducted in vitro, and the physiological significance of the findings is questioned. Conversely, while physiological evidence exists for FA translocation hypotheses, the evidence is largely correlative, leaving causal relationships unexplored. This review critically assesses evidence for the hypotheses and attempts to link the outcomes from mechanistic studies to physiological implications. Important directions for future studies, using current and novel approaches, are discussed.