Cursor's technical approach centers on context: the editor indexes your codebase, identifies relevant files and symbols, and includes them in prompts to the LLM. This codebase-awareness is what separates it from generic chat interfaces — when you ask "refactor the auth module to use JWT," Cursor knows which files contain the auth module, what the current implementation looks like, and what other files depend on it.
Cursor's decision to fork VS Code (rather than building a plugin) was controversial but strategic. A fork lets them deeply integrate AI into the editing experience — custom keybindings, inline diff views, AI-aware file navigation — in ways that a plugin's limited API surface doesn't allow. The trade-off is maintaining compatibility with VS Code's extension ecosystem while diverging on core features. Competitors like GitHub Copilot and Claude Code take different approaches: Copilot as a VS Code extension, Claude Code as a terminal-based tool.