Pepstatin is a potent peptidyl inhibitor of various malarial aspartic proteases, and also has parasiticidal activity. Activity of pepstatin against cultured Plasmodium falciparum is highly variable depending on the commercial source. Here we identify a minor contaminant (pepstatin butyl ester) as the active anti-parasitic principle. We synthesize a series of derivatives and characterize an analogue (pepstatin hexyl ester) with low nanomolar activity. By selecting resistant parasite mutants, we find that a parasite esterase, PfPARE (P. falciparum Prodrug Activation and Resistance Esterase) is required for activation of esterified pepstatin. Parasites with esterase mutations are resistant to pepstatin esters and to an open source antimalarial compound, MMV011438. Recombinant PfPARE hydrolyses pepstatin esters and de-esterifies MMV011438. We conclude that (1) pepstatin is a potent but poorly bioavailable antimalarial; (2) PfPARE is a functional esterase that is capable of activating prodrugs; (3) Mutations in PfPARE constitute a mechanism of antimalarial resistance.