Wnt proteins contain palmitoleic acid, an unusual lipid modification. Production of an active Wnt signal requires the acyltransferase Porcupine (Porcn) and depends on the attachment of palmitoleic acid to Wnt. The source of this monounsaturated fatty acid had not been identified, and it was not known how Porcn recognizes its substrate and whether desaturation occurs before or after fatty acid transfer to Wnt. We showed that Porcn can transfer monounsaturated, but not saturated fatty acids to Wnt. Next, we identified stearoyl desaturase (SCD) as the enzyme responsible for generating the monounsaturated fatty acid substrate for Porcn, and showed that SCD inhibition blocks Wnt3a secretion and renders Wnt inactive. These findings establish a role for SCD as an essential intermediate in Wnt protein biogenesis and processing, and reveal SCD inhibition as an alternative mechanism for blocking Wnt pathway activation. To further elucidate the molecular mechanism of Wnt acylation, we developed a cell-based Wnt acylation assay to directly monitor transfer of palmitoleate to Wnt3a. Using this system, we identified key residues within Porcn required for enzymatic activity, stability, and Wnt3a binding, and identified a consensus sequence within Wnt3a that contains residues that mediate Porcn binding, fatty acid transfer, and Wnt signaling. This structure-function analysis has enabled us to generate an initial working map of the active site of Porcn and to define a consensus sequence for Wnt palmitoleoylation.