The single-step syngas-to-dimethyl ether (STD) process entails economic and technical advantages over the current industrial two-step process. Pd/ZnO-based catalysts have recently emerged as interesting alternatives to currently used Cu/ZnO/Al2O3 catalysts, but the nature of the active site(s), the reaction mechanism, and the role of Pd and ZnO in the solid catalyst are not well established. Now, Zn-stabilized Pd colloids with a size of 2 nm served as the key building blocks for the methanol active component in bifunctional Pd/ZnO-gamma-Al2O3 catalysts. The catalysts were characterized by combining high-pressure operando X-ray absorption spectroscopy and DFT calculations. The enhanced stability, longevity, and high dimethyl ether selectivity observed makes Pd/ZnO-gamma-Al2O3 an effective alternative system for the STD process compared to Cu/ZnO/gamma-Al2O3.