Born at Königsberg (now Kaliningrad in Russia), Wallach studied at Berlin and at Göttingen, where he obtained his PhD in 1869. After a period in industry in Berlin he moved to Bonn (1870), becoming August Kekulé's assistant and later (1876) professor of chemistry. He remained at Bonn until 1889, when he moved to a similar chair at Göttingen.

When Wallach began to give regular classes in pharmacy he became interested in essential oils – oils removed from plants by steam distillation with wide uses in medicine and the perfume industry – and started research into determining their molecular structure. This study led to what was to become his major field of research, the chemistry of the terpenes.

These had hitherto presented considerable difficulties to the analytic chemist. Wallach succeeded in determining the structure of several terpenes, including limonene, in 1894. His greatest achievement, however, was his formulation of the isoprene rule in 1887. Isoprene, with the formula C₅H₈, had been isolated from rubber in the 1860s by C. Williams. Wallach showed that terpenes were derived from isoprene and therefore had the general formula (C₅H₈)_n; limonene is thus C_{1 0}H_{1 6}. Terpenes were of importance not only in the perfume industry but also as a source of camphors. It was also later established that vitamins A and D are related to the terpenes.

Wallach published 126 papers on the terpenes – work for which he was awarded the Nobel Prize for chemistry in 1910.