Mime, the Nibelung dwarf is plotting to obtain the Ring for himself, having raised Siegfried to kill Fafner for him. He needs a sword for Siegfried to use, but the youth has broken every blade he has made.  He shows Siegfried the shards of Nothung, and Siegfried orders him to reforge the sword.

Siegfried departs, leaving Mime in despair: it is beyond his skill to repair Nothung. An old man (Wotan in disguise) abruptly appears at his door. The Wanderer asks him to name the race most beloved of Wotan, but most harshly treated; the name of the blade that can destroy Fafner; and the person who can make the blade. Mime gives the answer to the first two riddles: the Wälsungs and Nothung. However, he is unable to answer the last riddle. Wotan spares Mime, telling him that only "he who does not know fear" can reforge Nothung, and leaves Mime’s head forfeit to that person.

Siegfried returns and is annoyed by Mime’s lack of progress. Mime realizes that the one thing he has not taught Siegfried is fear. Siegfried is eager to learn it, and Mime promises to teach him by bringing him to Fafner the dragon. Since Mime was unable to forge Nothung, Siegfried decides to do it himself and he succeeds.In the meantime, Mime, realizing that by the terms of his agreement with the Wanderer his head is now forfeit to Siegfried, brews a poisoned drink to offer Siegfried after the youth has defeated the dragon...