diff --git a/lib/vscode/src/vs/server/entry.ts b/lib/vscode/src/vs/server/entry.ts
index 85b306ab0..89a872d45 100644
--- a/lib/vscode/src/vs/server/entry.ts
+++ b/lib/vscode/src/vs/server/entry.ts
@@ -68,7 +68,7 @@ process.on('message', async (message: CodeServerMessage, socket) => {
 			}
 			break;
 		case 'socket':
-			vscode.handleWebSocket(socket, message.query);
+			vscode.handleWebSocket(socket, message.query, message.permessageDeflate);
 			break;
 	}
 });
diff --git a/lib/vscode/src/vs/server/ipc.d.ts b/lib/vscode/src/vs/server/ipc.d.ts
index bc605f038..a729a835f 100644
--- a/lib/vscode/src/vs/server/ipc.d.ts
+++ b/lib/vscode/src/vs/server/ipc.d.ts
@@ -19,6 +19,7 @@ export type Query = { [key: string]: string | string[] | undefined | Query | Que
 export interface SocketMessage {
 	type: 'socket';
 	query: Query;
+	permessageDeflate: boolean;
 }
 
 export interface CliMessage {
diff --git a/lib/vscode/src/vs/server/node/connection.ts b/lib/vscode/src/vs/server/node/connection.ts
index 51ca4d097..3b4d54ab9 100644
--- a/lib/vscode/src/vs/server/node/connection.ts
+++ b/lib/vscode/src/vs/server/node/connection.ts
@@ -4,7 +4,7 @@ import { VSBuffer } from 'vs/base/common/buffer';
 import { Emitter } from 'vs/base/common/event';
 import { FileAccess } from 'vs/base/common/network';
 import { ISocket } from 'vs/base/parts/ipc/common/ipc.net';
-import { NodeSocket } from 'vs/base/parts/ipc/node/ipc.net';
+import { WebSocketNodeSocket } from 'vs/base/parts/ipc/node/ipc.net';
 import { INativeEnvironmentService } from 'vs/platform/environment/common/environment';
 import { getNlsConfiguration } from 'vs/server/node/nls';
 import { Protocol } from 'vs/server/node/protocol';
@@ -88,7 +88,7 @@ export class ExtensionHostConnection extends Connection {
 	private readonly logger: Logger;
 
 	public constructor(
-		locale:string, protocol: Protocol, buffer: VSBuffer, token: string,
+		locale: string, protocol: Protocol, buffer: VSBuffer, token: string,
 		private readonly environment: INativeEnvironmentService,
 	) {
 		super(protocol, token);
@@ -115,11 +115,18 @@ export class ExtensionHostConnection extends Connection {
 	private sendInitMessage(buffer: VSBuffer): void {
 		const socket = this.protocol.getUnderlyingSocket();
 		socket.pause();
+
+		const wrapperSocket = this.protocol.getSocket();
+
 		this.logger.trace('Sending socket');
 		this.process!.send({ // Process must be set at this point.
 			type: 'VSCODE_EXTHOST_IPC_SOCKET',
-			initialDataChunk: (buffer.buffer as Buffer).toString('base64'),
-			skipWebSocketFrames: this.protocol.getSocket() instanceof NodeSocket,
+			initialDataChunk: Buffer.from(buffer.buffer).toString('base64'),
+			skipWebSocketFrames: !(wrapperSocket instanceof WebSocketNodeSocket),
+			permessageDeflate: this.protocol.options.permessageDeflate,
+			inflateBytes: wrapperSocket instanceof WebSocketNodeSocket
+				? Buffer.from(wrapperSocket.recordedInflateBytes.buffer).toString('base64')
+				: undefined,
 		}, socket);
 	}
 
diff --git a/lib/vscode/src/vs/server/node/protocol.ts b/lib/vscode/src/vs/server/node/protocol.ts
index af9bd1d99..15fa414e4 100644
--- a/lib/vscode/src/vs/server/node/protocol.ts
+++ b/lib/vscode/src/vs/server/node/protocol.ts
@@ -10,6 +10,9 @@ export interface SocketOptions {
 	readonly reconnectionToken: string;
 	readonly reconnection: boolean;
 	readonly skipWebSocketFrames: boolean;
+	readonly permessageDeflate?: boolean;
+	readonly inflateBytes?: VSBuffer;
+	readonly recordInflateBytes?: boolean;
 }
 
 export class Protocol extends PersistentProtocol {
@@ -17,7 +20,12 @@ export class Protocol extends PersistentProtocol {
 		super(
 			options.skipWebSocketFrames
 				? new NodeSocket(socket)
-				: new WebSocketNodeSocket(new NodeSocket(socket), false, null, false),
+				: new WebSocketNodeSocket(
+					new NodeSocket(socket),
+					options.permessageDeflate || false,
+					options.inflateBytes || null,
+					options.recordInflateBytes || false,
+				),
 		);
 	}
 
diff --git a/lib/vscode/src/vs/server/node/server.ts b/lib/vscode/src/vs/server/node/server.ts
index 65bb31f9e..c1b6e95ca 100644
--- a/lib/vscode/src/vs/server/node/server.ts
+++ b/lib/vscode/src/vs/server/node/server.ts
@@ -120,7 +120,7 @@ export class Vscode {
 		};
 	}
 
-	public async handleWebSocket(socket: net.Socket, query: Query): Promise<true> {
+	public async handleWebSocket(socket: net.Socket, query: Query, _permessageDeflate: boolean): Promise<true> {
 		if (!query.reconnectionToken) {
 			throw new Error('Reconnection token is missing from query parameters');
 		}
@@ -128,6 +128,7 @@ export class Vscode {
 			reconnectionToken: <string>query.reconnectionToken,
 			reconnection: query.reconnection === 'true',
 			skipWebSocketFrames: query.skipWebSocketFrames === 'true',
+			// TODO: permessageDeflate,
 		});
 		try {
 			await this.connect(await protocol.handshake(), protocol);
diff --git a/src/node/routes/vscode.ts b/src/node/routes/vscode.ts
index 38ac42bb1..4f1d14e9a 100644
--- a/src/node/routes/vscode.ts
+++ b/src/node/routes/vscode.ts
@@ -207,5 +207,8 @@ wsRouter.ws("/", ensureAuthenticated, async (req) => {
       `Sec-WebSocket-Accept: ${reply}`,
     ].join("\r\n") + "\r\n\r\n",
   )
-  await vscode.sendWebsocket(req.ws, req.query)
+  // TODO: Parse this header properly. Currently unused so haven't bothered.
+  const extensions = req.headers["sec-websocket-extensions"]
+  const permessageDeflate = extensions ? extensions.includes("permessage-deflate") : false
+  await vscode.sendWebsocket(req.ws, req.query, permessageDeflate)
 })
diff --git a/src/node/vscode.ts b/src/node/vscode.ts
index efdd74cad..44b46ec71 100644
--- a/src/node/vscode.ts
+++ b/src/node/vscode.ts
@@ -120,12 +120,12 @@ export class VscodeProvider {
   /**
    * VS Code expects a raw socket. It will handle all the web socket frames.
    */
-  public async sendWebsocket(socket: net.Socket, query: ipc.Query): Promise<void> {
+  public async sendWebsocket(socket: net.Socket, query: ipc.Query, permessageDeflate: boolean): Promise<void> {
     const vscode = await this._vscode
     // TLS sockets cannot be transferred to child processes so we need an
     // in-between. Non-TLS sockets will be returned as-is.
     const socketProxy = await this.socketProvider.createProxy(socket)
-    this.send({ type: "socket", query }, vscode, socketProxy)
+    this.send({ type: "socket", query, permessageDeflate }, vscode, socketProxy)
   }
 
   private send(message: ipc.CodeServerMessage, vscode?: cp.ChildProcess, socket?: net.Socket): void {