Indolyloxazole alkaloids occur in diverse micro- and macroorganisms and exhibit a wide range of pharmacological activities. Despite their ubiquitous occurrence and simple structures, the biosynthetic pathway remained unknown. Here, we used transposon mutagenesis in the labradorin producer Pseudomonas entomophila to identify a cryptic biosynthetic locus encoding an N-acyltransferase and a non-heme diiron desaturase-like enzyme. Heterologous expression in E. coli demonstrates that both enzymes are sufficient to produce indolyloxazoles. Probing their function in stable-isotope feeding experiments, we provide evidence for an unusual desaturase mechanism that generates the oxazole by decarboxylative cyclization.