Source: https://wiki.archlinux.org/title/Visual_Studio_Code#Blurry_text_under_Wayland

Due to Electron issues Visual Studio Code defaults to run under XWayland which may cause blurry text if you're using HiDPI screens.

In order to fix this issue you need to force Electron to run under Wayland by adding --enable-features=UseOzonePlatform --ozone-platform=wayland, for example you'll be launching VSCode like

$ code --enable-features=UseOzonePlatform --ozone-platform=wayland

This fix can be made permanent by creating a .desktop file or by directly editing /usr/share/applications/visual-studio-code.desktop