The Nibelung Alberich is charmed by the sight of the three Rhinemaidens playing in the water, but they repulse his advances and tease him. The sun lights up the gold which they are supposed to be guarding.
Unwisely, they let Alberich know that a ring forged from the gold will give its maker power to rule the world, the only condition being that he must forswear love. The frustrated Alberich is easily able to fulfil what they regard as an impossible condition; he seizes the gold, pronounces a curse on love and disappears, leaving the Rhinemaidens bewailing their loss.
Wotan is admiring his new castle, Valhalla, built for the gods by the giant brothers Fasolt and Fafner, but his wife Fricka is concerned about the price he has promised them - the goddess Freia, who runs in, pursued by the giants, claiming her as their reward. Wotan laughs at them, saying that he never had any intention of handing her over; but the terms of the agreement have been inscribed on the shaft of his spear, the symbol of his power, and Fasolt warns him that his power will be undermined if he fails to abide by his own treaty.
Fasolt wants Freia for her own sake, but Fafner is more interested in the practical aspect: the giants will gain an advantage if the gods are deprived of the youth they derive from Freia's golden apples. Freia has called on her brothers, Donner and Froh, for help, but Wotan restrains Donner from attacking the giants with his hammer, as he hopes that Loge, the cunning god of fire, will find a solution.
The giants are about to carry off Freia when the anxiously awaited Loge appears. He reports that his world-wide search for something the giants might accept in place of Freia was in vain: he found no one who did not prize the love of woman above everything - with one exception: Alberich, who had forsworn love to make a ring from the gold he stole from the Rhine. Wotan brushes aside the Rhinemaidens' request, relayed by Loge, for their gold to be returned.
The giants demand the gold as their payment instead of Freia, whom they carry off as a hostage until the gold is handed over. Deprived of Freia's apples, the gods begin to grow old and feeble. Wotan and Loge set off to find Alberich and obtain the gold.
Alberich has used the power of the ring to enslave his fellow Nibelungs, even his brother Mime, who has been ordered to make him a magic helmet, the Tarnhelm, which will enable the wearer to change his shape or make himself invisible. Mime tries to keep the helmet, but Alberich seizes it and beats him, as he laments to Wotan and Loge.
Alberich is suspicious of the visitors and warns them that he means to use his new power against the gods. Loge persuades him to show off the helmet. He changes himself into a dragon and they pretend terror, flattering him into showing how small he can make himself. He changes into a toad and is easily captured.
Wotan tells Alberich that the price of his freedom is the gold, including both the helmet and the ring, which he had hoped to retain. Seizing the ring, Wotan proclaims himself the mightiest of all lords. Set free, Alberich invokes a fearful curse on the ring: it will bring death and destruction on all who wear it.
The mists clear, revealing the waiting gods. The giants bring Freia back, but refuse to part with her until the gold has been heaped up in such a way that she is no longer visible. Like Alberich, Wotan had hoped to retain the helmet and the ring; but both are demanded to cover cracks through which Friea is still visible. He gives up the helmet, but refuses to part with the ring.
The earth goddess Erda appears and warns him to give up the ring to escape its curse, proclaiming that the doom of the gods themselves is at hand. Wotan wishes to know more, but she disappears. Wotan hands over the ring. Freia is free and the gods' youth is restored, but the giants quarrel over the gold and Fafner kills Fasolt. Wotan now realises the power of Alberich's curse.
Donner disperses the clouds with a blow of his hammer, which causes a thunderclap, and the rainbow bridge appears, leading to Valhalla. The gods cross it, with Loge unsure whether to throw in his lot with them. The Rhinemaidens can be heard lamenting their lost gold and the faithlessness of the gods.