Understanding DALI power supply
Simply use a readily available linear voltage regulator IC. They cost cents and are easy to use, and actually do work reliably across their full range. Current limiting can be achieved either by a linear supply with current limiting built-in, or using something like a low-side shunt resistor (much smaller than 12 Ω) (diode-)attached to the feedback port of an adjustable linear regulator.

Maybe you're already using a supply that has current limiting! Many switch-mode supply ICs have dedicated current sensing and limiting functionality.

Anyways:


  However I need some help understanding what exactly is happening.


When you draw a lot of current, the voltage across R1 becomes large enough to put the two diodes in forward operation, i.e. they start to conduct. Current going through the diodes can't go through the base of your transistor, which in turn "turns off".