Sand-fixing vegetation is crucial for preventing soil wind erosion, enhancing biodiversity, and enhancing ecosystem function. However, the mechanisms through which it influences biodiversity and ecosystems remain poorly understood. The relationship between species diversity and functional diversity during vegetation succession is unclear, which limits the evaluation of ecosystem restoration effectiveness. This study investigated plant communities at various stages of restoration in the Mu Us Desert, a once dry steppe region that underwent severe desertification due to excessive land reclamation, overgrazing, and climate change, resulting in extensive shifting sand dunes. Since the 1980s, aerial seeding of drought-tolerant native shrubs and subsequent full enclosure have significantly increased vegetation cover, yet variations in plant survival, strong interspecific competition, and persistent wind erosion have produced distinct recovery phases. To assess the dynamics of biodiversity and ecosystem function, we examined key environmental and biological parameters, including soil properties, plant functional traits, and community species composition. By integrating these factors, we aimed to reveal the changes in species diversity and functional diversity during vegetation restoration and explore the underlying relationships between them. The results demonstrated significant shifts in soil conditions, plant functional traits, and community diversity patterns. The results showed: (1) With vegetation restoration, soil moisture, and nutrient contents increased significantly, soil saturated permeability and bulk density decreased significantly, and clay and silt contents increased significantly; (2) Plant height, leaf carbon content, leaf nitrogen content, and specific root length all increased significantly. In contrast, specific leaf area, leaf thickness, leaf phosphorus content, and root phosphorus content decreased significantly. These changes indicate a shift in plant functional traits toward resource acquisition; (3) Species richness increased significantly, while evenness decreased, and the Shannon-Wiener index remained unchanged; (4) Although vegetation restoration improved species richness, all functional diversity indices-functional dispersion, divergence, evenness, richness, and Rao’s quadratic entropy-declined to varying degrees. Functional diversity was negatively correlated with species richness. These findings suggest that sand-fixing vegetation restoration reinforced environmental filtering, driving a shift in community adaptive strategies. While species diversity increased, plant communities exhibited convergent adaptation, leading to reduced functional diversity and limited improvement in resource use efficiency. Therefore, although the current vegetation cover has increased significantly and soil quality has improved after more than 20 years of restoration, it has not yet been restored to a functionally diverse and structurally stable community. In the future, it is still necessary to take strict protection measures, such as closure, to create conditions for the continued succession of the community.