The γ-butyrolactone motif is found in many natural signaling molecules and other specialized metabolites. A prominent example is the potent aquatic phytotoxin cyanobacterin, which has a highly functionalized γ-butyrolactone core structure. The enzymatic machinery that assembles cyanobacterin and structurally related natural products (herein termed furanolides) has remained elusive for decades. Here, we elucidate the biosynthetic process of furanolide assembly. The cyanobacterin biosynthetic gene cluster was identified by targeted bioinformatic screening and validated by heterologous expression in Escherichia coli. Full functional evaluation of the recombinant key enzymes in vivo and in vitro, individually and in concert, provided in-depth mechanistic insights into a streamlined C–C bond-forming cascade that involves installation of compatible reactivity at seemingly unreactive Cα positions of amino acid precursors. Our work extends the biosynthetic and biocatalytic toolbox for γ-butyrolactone formation, provides a general paradigm for furanolide biosynthesis and sets the stage for their targeted discovery, biosynthetic engineering and enzymatic synthesis. [Figure not available: see fulltext.]