Functional analysis of lysine 27-linked ubiquitin chains (K27Ub) is difficult due to the inability to make them through enzymatic methods and due to a lack of model tools and substrates. Here we generate a series of ubiquitin (Ub) tools to study how the deubiquitinase UCHL3 responds to K27Ub chains in comparison to lysine 63-linked chains and mono-Ub. From a crystal structure of a complex between UCHL3 and synthetic K27Ub2, we unexpectedly discover that free K27Ub2 and K27Ub2-conjugated substrates are natural inhibitors of UCHL3. Using our Ub tools to profile UCHL3's activity, we generate a quantitative kinetic model of the inhibitory mechanism and we find that K27Ub2 can inhibit UCHL3 covalently, by binding to its catalytic cysteine, and allosterically, by locking its catalytic loop tightly in place. Based on this inhibition mechanism, we propose that UCHL3 and K27Ub chains likely sense and regulate each other in cells.