Giant unilamellar vesicles (GUVs) are widely used as in vitro model membranes in biophysics and as cell-sized containers in synthetic biology. Despite their ubiquitous use, there is no one-size-fits-all method for their production. Numerous methods have been developed to meet the demanding requirements of reproducibility, reliability, and high yield, while simultaneously achieving robust encapsulation. Emulsion-based methods are often praised for their apparent simplicity and good yields; hence, methods like continuous droplet interface crossing encapsulation (cDICE) that make use of this principle, have gained popularity. However, the underlying physical principles governing the formation of GUVs in cDICE and related methods remain poorly understood. To this end, we have developed a high-speed microscopy setup that allows us to visualize GUV formation in real-time. Our experiments reveal a complex droplet formation process occurring at the capillary orifice, generating both larger droplets and, likely, GUV-sized satellite droplets. According to existing theoretical models, the oil-water interface should allow for crossing of all droplets, but based on our observations and theoretical modelling of the fluid dynamics within the system, we find a size-selective crossing of GUV-sized droplets only. Finally, we demonstrate that proteins in the inner solution affect GUV formation by increasing the viscosity and altering lipid adsorption kinetics.