Dynamic vulcanization has been demonstrated to be a versatile and efficient way of improving impact toughness of PLA. However, the existing vulcanization routes usually suffer from complicated presynthetic procedures and use of nonrenewable modifiers as well as markedly enhanced melt-viscosity. Herein, using both biomass-derived hydrogenated dimer acid (HDA) and an excess molar amount of l-lysine ethyl ester diisocyanate (LDI) as toughening monomers, we have developed a facile yet highly effective diisocyanate method for the design of fully bio-based PLA blends with excellent impact toughness and melt-flowability. The in situ formation and self-cross-linking of flexible biopolyamide (HDAPA) toughener, as well as its reactive compatibilization with PLA, were accomplished in a single melt-blending step. When incorporating the amount of HDAPA from 15 to 20 wt % or higher, the resulting blends evolved from the network-like morphology to the bi-continuous one with the cross-linked HDAPA network. At HDAPA content higher than 10 wt %, a sharp and persistent brittle–ductile transition occurred with an equilibrium impact strength of over 1200 J/m, and elongation-at-break was over 400%. Moreover, such a tremendous toughening effect was accompanied by low melt-viscosity and enhanced PLA crystallization. The matrix yielding triggered by internal cavitation of percolated HDAPA domains, together with the pull-out of many in situ formed block copolymers located at the interfaces, was found to be the major impact-toughening mechanism. This work offers a novel and facile strategy for fabricating high-performance and fully bio-based polymeric materials.