Papain-like protease (PLpro) is a promising therapeutic target against SARS-CoV-2, but its restricted S1/S2 subsites pose an obstacle in developing active site-directed inhibitors. We have recently identified C270 as a novel covalent allosteric site for SARS-CoV-2 PLproinhibitors. Here we present a theoretical investigation of the proteolysis reaction catalyzed by the wild-type SARS-CoV-2 PLproas well as the C270R mutant. Enhanced sampling MD simulations were first performed to explore the influence of C270R mutation on the protease dynamics, and sampled thermodynamically favorable conformations were then submitted to MM/PBSA and QM/MM MD simulations for thorough characterization of the protease-substrate binding and covalent reactions. The disclosed proteolysis mechanism of PLpro, as characterized by the occurrence of proton transfer from the catalytic C111 to H272 prior to the substrate binding and with deacylation being the rate-determining step of the whole proteolysis process, is not completely identical to that of the 3C-like protease, another key cysteine protease of coronaviruses. The C270R mutation alters the structural dynamics of the BL2 loop that indirectly impairs the catalytic function of H272 and reduces the binding of the substrate with the protease, ultimately showing an inhibitory effect on PLpro. Together, these results provide a comprehensive understanding at the atomic level of the key aspects of SARS-CoV-2 PLproproteolysis, including the catalytic activity allosterically regulated by C270 modification, which is crucial to the follow-up inhibitor design and development.