The domain was founded in 1863, when Naotaka NAGAI, the eighth lord of Yamato Shinjo Domain, moved the government office to Kujira, as a result of the reform of the Sankinkotai (a system under which feudal lords in the Edo period were required to spend every other year in residence in Edo) implemented by the shogunate as part of its Bunkyu Reform.
文久3年（1863年）、大和新庄藩の第8代藩主・永井直壮は幕府による文久の改革の一端である参勤交代制度改革の余波を受けて、陣屋を櫛羅に新設したことから、櫛羅藩を立藩した。