To investigate the compaction effect and environmental impact effect of dynamic compaction (DC), a 3D continuous-discrete coupling method was used to simulate the hammer-soil interaction process for the first time. Through the dynamic response analysis of the hammer, it is found that the force of the hammer changes through three stages: the contact force increases rapidly, the contact force decreases rapidly, and the contact force decreases slowly; in addition, the soil particles are compacted under the dynamic load, resulting in oscillating changes in the soil porosity. The granular soil is punched by the hammer to form a truncated punching surface in the bulk below the bottom of the hammer. Ellipsoidal compaction bands are formed inside the punching surface, and shear bands are formed outside the punching surface. The compression and shear zones affect the soil outside the continuous-discrete interface and form a stress concentration zone and a plastic strain zone near the interface, resulting in a sharp attenuation of the acceleration amplitude as the radial distance increases. Through an amplitude and Fourier spectrum analysis, it is found that the radial vibration caused by the DC is the strongest, while the tangential and vertical vibrations are almost the same. With the increase in the radial distance, the radial vibration attenuation rate is greater than that of the tangential and vertical vibrations, and their PGAs tend to be the same away from the impact point. These research results are helpful for evaluating the influence of the DC and the installation process on the reinforcement effect of the soft ground and for improving the accurate design and control level of soft ground strengthened by DC.