It makes perfect sense that a bass with this Dyna preamp would sound better with the preamp completely out of the signal path vs 'passive' mode. It's a very cool design that has features that really didn't become standard until the last couple decades: active/passive with a passive tone control. However, it's a preamp design from the mid 80s, so it's not the most transparent sounding preamp.
I learned a lot about that pre when I got my 91 Dyna 5 as a basket case project. The preamp was pretty rough. The switch was shot and it needed a new jack. Most of the pots were janky at best: loose torque, scratchy/noisy, not making good contact throughout the sweep... As everyone here knows, finding those spider pots is impossible, and it's rare a working Dyna preamp came up for sale. Replacing the jack and switch was easy, the pots were not. I gave up looking for a pre or the pots. I then removed the pots from the board, took them apart, cleaned them up, reassembled them and reinstalled on the board. Fingers crossed, they all worked! I got lucky. If that fix didn't work out, I was looking into Vol Blend Tone passive mode or perhaps an Audere preamp.