Domestic sheep are descended from Mouflon, wild sheep that have normal coats and need no shearing.

Many mammals have a double layer coat, with long coarse guard hair on on the outside to protect from wind and rain, and softer undercoat made up of short hair for insulation.

Sheep were selected to have longer undercoats, and that is what the fleece is.

I'm not sure if this is a history question so much as it is a biology question. You might want to ask on /r/askscience.