Lincoln started out as the village of Lancaster, which was founded in 1856, and became the county seat of the newly-created Lancaster County in 1859.
The capital of Nebraska Territory had been Omaha since the creation of the territory in 1854; however, most of the territory's population lived south of the Platte River. After much of the territory south of the Platte considered annexation to Kansas, the legislature voted to move the capital south of the river and as far west as possible. The village of Lancaster was chosen, in part due to the salt flats and marshes nearby.
However, Omaha interests attempted to derail the move by having Lancaster renamed after the recently assassinated President Abraham Lincoln. At the time, many of the people south of the river had been sympathetic towards the Confererate cause and it was assumed that the legislature would not pass the measure if the future capital was named after Lincoln. The ploy did not work, as Lancaster was renamed Lincoln and became the state capital upon Nebraska's admission to the Union on March 1, 1867.
Lincoln is the capital of Nebraska and is the county seat of Lancaster County. It is the second largest city in the state (after Omaha).