Dynamic compaction is one of the effective methods to eliminate collapsibility of loess foundation. In order to study the mechanism of eliminating loess collapsibility by dynamic compaction, particle size test, collapsibility test, scanning electron microscope test and soil-water characteristic curve (SWCC) test were conducted on undistributed loess and compacted loess in Tongchuan City. The above experimental data was used for analyzing the effect of dynamic compaction on the particle size distribution, microstructural and unsaturated characteristic of loess, as well as the relation between these factors and collapsibility. It is shown that the clay content of the loess in Tongchuan area increases significantly under dynamic compaction. It is found that when the clay content is greater than 36.2%, the loess is no longer collapsible. It is observed that dynamic compaction leads to the formation of small and micro pores from collapsed macropores and mesopores. As a consequence, the density of particles increases and the collapsibility decreases. The slope of the SWCC curve desaturation section of compacted loess is greater than that for undistributed loess. This is because clay particles formed under dynamic compaction act as cementation materials, which is considered to increase the strength of cementation on the one hand, and to be filled in the pores on the other hand, increasing the density of loess. Finally, the results show that the SWCC curve fitting parameter a is related to the proportion of micro-pore area and the collapsibility coefficient. The collapsibility of loess can be judged indirectly from the characteristics of the SWCC curve.