The time of a satellite navigation system is primarily generated by the main control station of the ground system. Consequently, when ground stations fail, there is a risk to the continuous provision of time services to the equipment and users. Furthermore, the anticipated launch of additional satellites will further strain the satellite–ground link. Next-generation satellite navigation systems will rely on time deviation measurements from inter-satellite links to independently establish and maintain a space-based time reference, enhancing the system’s reliability and robustness. The increasing number of low-Earth-orbit satellite navigation constellations provides ample resources for establishing a space-based time reference. However, this also introduces challenges, including extensive time scale computations, increased link noise, and low clock resource utilization. To address these issues, this paper proposes a Distributed Kalman Plus Weight (D-KPW) algorithm, which combines the benefits of Kalman filtering and the weighted average algorithm, balancing the performance with computational resources. Furthermore, an adaptive clock control algorithm, D-KPW (Control), is developed to account for both the short-term and long-term frequency stability of the time reference. The experimental results demonstrate that the frequency stability of the time reference established by the D-KPW (Control) algorithm reaches 7.40×10−15 and 2.30×10−15 for sampling intervals of 1000 s and 1,000,000 s, respectively, outperforming traditional algorithms such as ALGOS. The 20-day prediction error of the time reference is 1.55 ns. Compared to traditional algorithms such as AT1, ALGOS, Kalman, and D-KPW, the accuracy improves by 65%, 65%, 66%, and 67%, respectively.