The Valley of Peace was founded nearly a thousand years ago (prior to the events of the first film) by Master Oogway. After departing from his home in the Galápagos Islands, he went on a journey of discovery, traveling all around the world and visiting every country until he arrived in China. Oogway stood on a hill overlooking the Valley and knew that he had found the place he would call home for the rest of his life. He would even save the Valley of Peace from sadistic demons and their leader, Ke-Pa, by sealing the demons on a mountain, and built the Jade Palace on top of it to protect it, and traps Ke-Pa in the body of a mortal pig with the power of the Sacred Peach Tree of Heavenly Wisdom.
The third chapter of Legend of the Legendary Warrior describes how Oogway later observed the 'plight of the oppressed' and wept into what is now known as the Pool of Sacred Tears. Wanting to protect those that were considered 'soft and weak' from the 'hard and strong', Oogway formed the self-defense system of Kung Fu as a force for good. He worked many years to perfect this system and help make the Valley a safe haven and a peaceful place to live. He helped to form the thousand-mile-long bridge that guarantees safe passage into the Valley, and admitted students under his instruction in learning the art of Kung Fu. At this time, with the Valley and its inhabitants now well-protected, it is presumed that the Valley had thus been named the Valley of Peace. Master Oogway would be the leader of the Jade Palace for a few more years until his death, and leaves Shifu in charge of the Jade Palace, and he trains Po into becoming the Dragon Warrior, the one who will be the main guardian of the Valley of Peace.