Livestock grazing is a primary land use in drylands, where its exclusion is often implemented for ecosystem restoration. This approach assumes that removing livestock pressure facilitates passive recovery. We challenge this assumption by investigating the long-term effects of continuous grazing versus exclusion in an area fenced since 2001 on hillslope geomorphology, hydrology, and functional resilience in a temperate steppe on the Loess Plateau, Northwest China. Through field surveys and statistical modeling, we found that grazing and its exclusion create two distinct alternative ecosystem states. Long-term grazing can engineer a relatively stable and organized landscape of interconnected trails and vegetated patches. This biotic-geomorphic coupling enhances soil moisture by creating an efficient water-harvesting network. Conversely, grazing exclusion initiates a geomorphic regime shift: trails decay, the hydrological network collapses, and the landscape becomes dominated by disorganized rill erosion. Although exclusion increased above-ground biomass, this apparent recovery masked a state of geomorphic and hydrological degradation. The ungrazed system exhibited generally lower soil moisture and a reduced level of functional resilience, evidenced by lower temporal stability of belowground biomass and heightened sensitivity to precipitation. Our findings demonstrate that long-term grazing can maintain a hydrologically superior and more resilient ecosystem state. The uniform application of grazing exclusion may inadvertently dismantle critical landscape infrastructure, leading to a functionally degraded and less resilient ecosystem.