The DEM generalization is the basis of multi-dimensional observation, the basis of expressing and analyzing the terrain. DEM is also the core of building the Multi-Scale Geographic Database. Thus, many researchers have studied both the theory and the method of DEM generalization. This paper proposed a new method of generalizing terrain, which extracts feature points based on the tree model construction which considering the nested relationship of watershed characteristics. The paper used the 5 m resolution DEM of the Jiuyuan gully watersheds in the Loess Plateau as the original data and extracted the feature points in every single watershed to reconstruct the DEM. The paper has achieved generalization from 1:10000 DEM to 1:50000 DEM by computing the best threshold. The best threshold is 0.06. In the last part of the paper, the height accuracy of the generalized DEM is analyzed by comparing it with some other classic methods, such as aggregation, resample, and VIP based on the original 1:50000 DEM. The outcome shows that the method performed well. The method can choose the best threshold according to the target generalization scale to decide the density of the feature points in the watershed. Meanwhile, this method can reserve the skeleton of the terrain, which can meet the needs of different levels of generalization. Additionally, through overlapped contour contrast, elevation statistical parameters and slope and aspect analysis, we found out that the W8D algorithm performed well and effectively in terrain representation.