The basis for this settlement came from an earlier Eternian village that was populated by Humans that lived not very far from the mountains of Darksmoke that was home to Dragonkind.
In later years, the village was attacked by dragons led by Morning Star who instigated a conspiracy by blaming Humans for putting out the fire of Granamyr. Leading the angry dragons against the Humans, they attacked the village as part of Morning Stars secret ambition to rule all of Eternia. However, He-Man, Man-At-Arms and Orko journeyed into the Pit of Shadows where they returned Granamyr's magic by coming back with the mystical dragon fire. Learning of Morning Stars betrayal, Granamyr fought the other dragon in a trial by fire and overpowered him thus ending the war. In atonement for their unprovoked assault against the village, Granamyr pledged to the villagers that he and his dragons would construct the most beautiful city for them the likes of which had never been seen. Thus was born the City of Peace as Granamyr named it which would cement the peace between Dragons and Humans on the anniversary of the treaty between the two races.