Secluded from the outside world, the blacksmith Mime has raised Sieglinde and Siegmund's son, Siegfried, who now bullies him as a fearless grown man. Siegfried knows nothing of his family, but instinctively senses that he cannot be related to Mime. He pesters him until he reveals his origins and his mother's legacy: the broken sword Nothung. Siegfried demands that Mime reforge it, leaving him alone with this insoluble task. Mime's craft is not sufficient to reforge the sword Nothung, which once broke on Wotan's spear. But only with Nothung can Fafner, who has appropriated the Ring and the hoard of the Nibelung after murdering his brother in "Rheingold", be defeated. Siegfried is to perform this deed and conquer the Ring for Mime and with it dominion over the world. Wotan, who has been roaming the world as a wanderer for some time, appears in Mime's dwelling and imposes on him a knowledge wager for life and death. He is to ask three questions and answer three. Although Mime recognises Wotan, he does not take the opportunity to learn from him how to reforge the sword. He only learns who will accomplish this: "Only those who have never known fear can reforge Nothung!" Wotan leaves Mime's life in the hands of that fearless smith. Siegfried returns and now tries his hand at the sword pieces himself. He melts them down and forges the sword. Mime, meanwhile, realises that it is Siegfried who will slay him and plots to poison him once he has killed Fafner for him.
Alberich waits outside Fafner's cave for an opportunity to regain possession of the Ring. The arriving Wotan professes to have come without evil intent and tells the Alben that his brother Mime is on his way with Siegfried to take possession of the Nibelungen hoard. He advises Alberich to warn Fafner and demand the ring in return. Fafner, however, refuses the deal and continues to sleep, whereupon Wotan leaves the scene laughing derisively. Siegfried and Mime arrive in front of Fafner's envious cave. The dwarf retreats fearfully. The fearless Siegfried, however, is haunted by the mystery of his origins and hopes to find answers to his questions in nature. When he tries to contact the birds with his horn, he wakes Fafner. After a short fight, the imposing enemy is defeated. Before he succumbs to his injuries, Fafner tries to warn Siegfried about Mime's trickery and the curse on the ring. But Siegfried is not impressed by the words. After tasting Fafner's blood, Siegfried understands the language of the birds. On the advice of the forest bird, he takes the ring and the camouflage helmet. Mime cunningly offers his foster son his home-brewed sleeping draught as a supposed refreshment. But Siegfried can now hear his deceitful thoughts and slays him. Under Alberich's sneering laughter, Siegfried makes his way to the sleeping Brünnhilde at the instruction of the forest bird.
Wotan seeks out Erda once more. He has chosen Siegfried and Brünnhilde to free the world from the curse of the Ring. He hopes for confirmation from Erda, Brünnhilde's mother, but it does not come. Annoyed, he puts her, like their daughter before her, into eternal sleep. On the way to Brünnhilde, Siegfried and his grandfather Wotan meet for the first time. The young man meets the former world leader with carefree disrespect. When Wotan denies him the way to Brünnhilde, Siegfried smashes Wotan's spear with the sword Nothung and the former god departs, defeated. Siegfried passes through the ring of fire, finds the sleeping Brünnhilde and kisses her awake. In the face of the first woman he sees and the love that overwhelms him, Siegfried learns to fear. Brünnhilde recognises in her nephew the hero Wotan has predestined for her. The two celebrate their liberating union regardless of all the consequences - "shining love, laughing death".