Diamond nanoparticles attract much attention as they combine outstanding mechanical properties with biocompatibility and are available in large quantities. Control and tunability of the particle size is very important for any nanomaterial. Although oxidation can burn carbon and lead to a particle size decrease, this technique could not be successfully employed for nanodiamond size reduction on the nanoscale. In this work, two commercial nanodiamond powders are used to demonstrate separation of the oxidation reaction into two steps (i) the oxygen chemisorption and (ii) the CO and/or CO2 desorption. This allows for an effective control of the oxidation process. In situ thermogravimetric analysis suggests that the oxidation is thermodynamically rather than kinetically controlled, and that the carbon burn off can be adjusted by repeating chemisorption/desorption steps to remove carbon layer after layer. Small-angle X-ray scattering (SAXS) characterization of the diamond nanoparticles showed a continuous size decrease from 5.2 to 4.8 nm during 15 layer-by-layer (LbL) oxidation cycles, in contrast to average particle size increase observed in the case of continuous oxidation in air. In accordance with the size decrease after LbL oxidation, the specific surface area (SSA) of the nanopowders increased.