The canal along Nyhavn is a manmade canal, similar to Holmen's Canal, finished in 1671. Its purpose was to strengthen the commercial life in the heart of Copenhagen and ease the merchant's fleet transport of goods from near and far. Commercial life flourished as the newly expanded access route made it possible to sail all the way into Kongens Nytorv. Picturesque townsmen's houses appeared, and today the unique environment along the north side of Nyhavn is still preserved. The 250-year-old houses in red, yellow and blue colors are reflected in the water and constitute a beautiful interplay with the old wooden ships along the dock.

In the past, the quarter has been notorious for fights and drunken sailors, but in only a few years Nyhavn has transformed into a modern place with fine-dining restaurants and luxurious, expensive hotels. Today, some of the ships have been converted into restaurants, houseboats and a boat theatre to accommodate the influx of tourism.