On April 15, 1846, and after a year in building, Niagara set off on its first experimental trial on Lake Erie. With an extreme length of 245 feet, it was second in size to only the Empire, but was predicted to carry a larger cargo and thus make greater profit. It was noted by contemporary papers for its speed (exceeding 15 miles per hour) and its luxurious accommodations. The Niagara's impressive performance and overall splendor reflected its strong pedigree. It was built along the latest design due to the efforts of one of the Great Lakes most successful businessmen, Charles M. Reed, the region's best known shipyard, Bidwell and Banta of Buffalo, New York, and the U.S. senior marine steam engine builder, James P. Allaire.

The Niagara was built to take part in the 1840s Buffalo to Chicago run. Its initial foray into that service, however, was unsuccessful when it was grounded at the St. Clair flats enroute to Chicago. Despite failing to reach its destination, the Niagara returned to Buffalo carrying a mixed bounty from the western lands, including tubs of butter, barrels of skins, hides, and furs, flour, and pigs of lead. Its powerful Allaire engine shortly allowed the Niagara to set a record time back from Chicago; it made the trip in 70 hours (or 75 with stoppages), returning to Buffalo 35 hours ahead of schedule. In its first year of service, it made one trip every two weeks carrying a variety of cargo, until late season when lake levels dropped.

Following its inaugural year, contemporary references to the Niagara diminished in volume. Despite discussions of transferring the ship to a different run, the Niagara seems to have continued steady trips between Buffalo and Chicago. In 1851, the New York and Erie Railroad line opened with Dunkirk, New York, as its Lake Erie terminus. Charles Reed chartered Niagara, Empire, and Keystone State, which were no longer first line vessels, out to the new railroad to carry passengers between Detroit and Dunkirk. Niagara was involved in a serious accident on the Detroit River late in the 1851 season, colliding with the anchored brig Lucy A. Blossom.

On January 1, 1855, the final phase of the Northern Railway connecting Toronto with the Great Lakes was completed. To connect Collingwood, Ontario, with Chicago, the railroad's directors contracted with Charles Reed. The Niagara was chartered to the railroad for its final season.
On September 24, 1856, Niagara caught fire. Passengers and crew jumped overboard or into the lifeboats, with some being rescued by nearby schooners Dan Marble and Pilot, and steamer Travelor. It sank approximately one mile offshore south of Belgium, Wisconsin, with its freight listed as a total loss. Although Niagara carried several lifeboats, two accidents during the disaster caused dozens of deaths. Confusion, panic, and rumor obscure the details of the fire, although according to available resources, no definitive cause could be identified. Captain F.S. Miller survived. Salvage efforts were apparently never mounted.
Despite the value of Niagara's cargo and machinery, the location of the wreck was lost from public memory until the 1950s and 1960s, when recreational scuba diving rekindled interest in old shipwrecks. The main wreck of the Niagara lies in 55 feet of water and consists of the aft end of the ship; the bilge is broken just forward of the machinery; the side of the hull have broken at the turn of the bilge and lie flat alongside on the bottom. The central keelson and two floor keelsons are extant, as is the vessel machinery, engine, walking beam, and triple firebox boilers (the last are north of the main wreck). The vessel's paddlewheels are extant but largely broken up: hub and inner spokes remain attached, the portside wheel is better preserved and still has portions of the buckets (or floats) articulated.

A dive guide for this vessel is available for purchase.