The IDE wars are heating up. Just weeks after Cursor AI hit a $2.3B valuation, Microsoft has deployed its counter-strategy. VS Code 1.98 (January 2026 Release) isn't just a maintenance update—it is a fundamental architectural shift to support "Agentic Coding" natively.
1. Native Multi-File Edits (No Extensions Required)
The killer feature of Cursor was "Composer"—the ability to edit multiple files simultaneously with one prompt. VS Code 1.98 introduces Workspace Edit API v2.
Copilot Chat can now natively plan and execute changes across your entire repository. If you ask it to "Rename the User component to Profile and update all imports," it creates a transaction plan, shows you a diff of all 15 touched files, and executes it atomically. No more opening files one by one.
2. "Project Islay": Voice-First Coding
Previously hinted at in Insiders builds, Project Islay is now in public preview. This isn't just dictation. It's a semantic voice interface.
Example Command:
"Hey Code, run the tests for the auth module, and if they fail, show me the logs side-by-side with the failing controller."
The editor understands context, window layout, and terminal output, allowing for hands-free debugging sessions—a massive win for accessibility and "flow state" programming.
3. The Agent Extension API
Perhaps the most significant long-term change is the new `vscode.agents` namespace. Microsoft is opening the floodgates for third-party AI agents.
- What it means: You aren't locked into Copilot. Extensions like DeepSeek Code or Claude Dev can now hook into the same deep context engine that Copilot uses.
- Standardization: It defines a standard protocol for agents to propose code actions, read terminal outputs, and query the file system securely.
Performance: The Rust Factor
Under the hood, the file watcher and search service have been rewritten in Rust (migrating away from the old Node.js watcher). Large repositories (monorepos with 100k+ files) now index 4x faster, addressing one of the biggest complaints against Electron-based editors.
Conclusion
VS Code 1.98 is Microsoft's declaration that they intend to own the "OS for AI Development." By baking agentic capabilities into the core API, they are trying to commoditize the innovations of startups like Cursor. Whether developers will switch back remains to be seen, but the gap has certainly narrowed.