Nanometer-sized diamond grains are commonly found in primitive chondritic meteorites, but their origin is puzzling. Using evidence from atomistic simulation, we establish a mechanism by which nanodiamonds form abundantly in space in a two-stage process involving condensation of vapor to form carbon onions followed by transformation to nanodiamond in an energetic impact. This nonequilibrium process is consistent with common environments in space and invokes the fewest assumptions of any proposed model. Accordingly, our model can explain nanodiamond formation in both presolar and solar environments. The model provides an attractive framework for understanding noble gas incorporation and explains all key features of meteoritic nanodiamond, including size, shape, and polytype. By understanding the creation of nanodiamonds, new opportunities arise for their exploitation as a powerful astrophysical probe.