[BUG] Setting DISABLE_PROMPT_CACHING Environment Variable Causes 401 Unauthorized Errors

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

When the environment variable DISABLE_PROMPT_CACHING is set, the Claude Code extension fails to authenticate, resulting in a 401 Unauthorized error. Unsetting this environment variable immediately resolves the issue.

This behavior is unexpected because a feature flag for caching should not interfere with the authentication flow. Furthermore, this environment variable appears to be undocumented, making the issue difficult to diagnose.

What Should Happen?

Setting DISABLE_PROMPT_CACHING=true should disable prompt caching as intended, without affecting the user's authentication status. All commands should execute normally after a successful login.

Error Messages/Logs

API Error: 401 {"type":"error","error":{"type":"authentication_error","message":"OAuth authentication is currently not 
     supported."},"request_id":"req_011CTgM7o63aV9K39BERJn7c"} · Please run /login

The Debug log is below.

[ERROR] SyntaxError: SyntaxError: JSON Parse error: Unexpected identifier "API"
    at <parse> (:0)
    at parse (unknown)
    at <anonymous> (/$bunfs/root/claude:568:9937)
    at W (/$bunfs/root/claude:534:13292)
    at tFG (/$bunfs/root/claude:896:37032)
    at processTicksAndRejections (native:7:39)
[ERROR] Error in non-streaming fallback: 401 {"type":"error","error":{"type":"authentication_error","message":"OAuth authentication is currently not supported."},"request_id":"req_011CTgLuT9f6gsMsASFAMVqk"}
[ERROR] Error: Error: 401 {"type":"error","error":{"type":"authentication_error","message":"OAuth authentication is currently not supported."},"request_id":"req_011CTgLuT9f6gsMsASFAMVqk"}
    at new W5 (unknown:1:28)
    at new _Y (/$bunfs/root/claude:716:20515)
    at new jv (unknown:1:28)
    at generate (/$bunfs/root/claude:716:21006)
    at makeRequest (/$bunfs/root/claude:871:5359)
    at processTicksAndRejections (native:7:39)

Steps to Reproduce

In your terminal, set the environment variable:

export DISABLE_PROMPT_CACHING=true

Launch or restart Claude code from the same terminal session to ensure it inherits the environment variable.

Attempt to use any Claude Code command that requires authentication (e.g., /edit, /fix, or starting a new chat).

Observe the 401 Unauthorized error.

Claude Model

Sonnet (default)

Is this a regression?

Yes, this worked in a previous version

Last Working Version

1.0.88

Claude Code Version

2.0.1

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

Warp

Additional Information

<img width="1250" height="594" alt="Image" src="https://github.com/user-attachments/assets/ce22f93d-7556-4e19-a192-49db5369aa9e" />

You can just check the command "unset" and then it works. 404 error is not important.