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I don’t think the popular vote compact would diminish the two parties.
As far as I understand it the compact says all the states in the compact will pledge their electoral college electors to the popular vote winner.
The popular vote winner is still just the candidate with the most votes nationally so all the incentives and structures that lead to two parties are still at play.
Third parties are suppressed in a winner take all system largely due to the spoiler effect, a smaller third party pulls votes from a larger party.
Voters would still be incentivized to vote for one of the two major parties witb the same logic as today, a vote for a third party has little chance of winning and so it largely has the effect of denying a vote to the major party you would most align with.
To be clear, I think the way we’ve arranged democracy in America is quite stupid and mathematically guarantees a duopoly of parties both of which become enmeshed with and captured by the donor class. A popular vote compact is better than the goofy electoral college, I just don’t think it really does anything to break the grip of the two party system.