Deucravacitinib is a highly selective allosteric inhibitor of protein tyrosine kinase 2 (TYK2). It targets the Janus kinase (JAK) signal transducer and activator of transcription (STAT) pathway. Despite its selectivity, the structural basis for its inhibition mechanism remains poorly understood. Here, we analyze available atomic resolution structures relevant to the JAK-STAT pathway to investigate the TYK2 inhibition mechanism. Our computational analysis suggests a mechanistic hypothesis for the relatively rapid interferon-induced gene expression mediated by TYK2 compared to other cytokine pathways. We find that deucravacitinib and other TYK2-specific allosteric drugs inhibit TYK2 kinase in three distinct states: an autoinhibited state and two activated states. The activated states are involved in autophosphorylation and the phosphorylation of downstream proteins. In the autoinhibited state, deucravacitinib binds to the TYK2 pseudokinase domain. This binding restricts essential dynamics of the TYK2 kinase domain needed for kinase activity. Additionally, deucravacitinib competes with ATP binding in the pseudokinase domain. This competitive binding directly prevents the formation of the active TYK2 state through steric clashes.