Eventually, the Licchavi ruler Gunakamadeva merged Koligram and Dakshin Koligram, founding the city of Kathmandu. The city was designed in the shape of Chandrahrasa, the sword of Manjushri. The city was surrounded by eight barracks guarded by Ajimas. One of these barracks is still in use at Bhadrakali (in front of Singha Durbar). The city served as an important transit point in the trade between India and Tibet, leading to tremendous growth in architecture. Descriptions of buildings such as Managriha, Kailaskut Bhawan, and Bhadradiwas Bhawan have been found in the surviving journals of travelers and monks who lived during this era. For example, the famous 7th-century Chinese traveller Xuanzang described Kailaskut Bhawan, the palace of the Licchavi king Amshuverma. The trade route also led to cultural exchange as well. The artistry of the Newar people—the indigenous inhabitants of the Kathmandu Valley—became highly sought after during this era, both within the Valley and throughout the greater Himalayas. Newar artists travelled extensively throughout Asia, creating religious art for their neighbors. For example, Araniko led a group of his compatriot artists through Tibet and China. Bhrikuti, the princess of Nepal who married Tibetan monarch Songtsän Gampo, was instrumental in introducing Buddhism to Tibet.

Kathmandu resulted from the merger of what two settlements?