According to an old legend, the present-day territory of Ali Adde was covered by trees, with a wadi crossing the area. Originally a small settlement, the town grew under the reign of the Ifat Sultanate and Adal Sultanate. It later formed a part of the French Somaliland protectorate in the first half of the 20th century. In December 1942, about 1,000 British and French Free troops occupied the town. Ali Adde has an old fort near the Wadi Danan, which was built by the French Army in the 19th century.
