DDI2 is an aspartic protease that cleaves polyubiquitinated substrates. Upon proteotoxic stress, DDI2 activates the ER-bound transcription factor TCF11/NRF1 (NFE2L1), a master regulator of proteostasis maintenance in mammalian cells, and ensures the expression of rescue factors including proteasome subunits. Here we describe the consequences of DDI2 ablation both in vivo and in cells. Knock-out of DDI2 in mice resulted in embryonic lethality at E12.5 with severe developmental failure. Molecular characterization of the embryos and surrogate DDI2 knock-out cell lines showed insufficient proteasome expression with proteotoxic stress, accumulation of high molecular weight ubiquitin conjugates, and induction of the unfolded protein and integrated stress responses. We also show that DDI2 KO-induced proteotoxic stress causes the cell-autonomous innate immune system to induce a type I interferon signature. These results indicate an important role for DDI2 in the proteostasis network of cells and tissues and in the maintenance of a balanced immune response.