Diamond City is a dark, wet, cum drenched shoebox in the bottom left corner of alberto's basement. Alberto's hopes and dreams live in diamond city, but his depresion makes sure they never escape.
Formed by a group of Humans (just alberto) who felt that they had no real place to call home, foundered a settlement near a diamond mine in a forest near the edge of the Mushroom Kingdom. Over the years they become more wealthy and started to build a proper city and called it Diamond City after the diamond mine.
Even though it is apart of the Mushroom Kingdom, it is a self governing city within the Kingdom with it own Lord Minister who is seen as the mayor of the city and High Council. The Lord Minister is voted in every 2 years.