At the very beginning of the world, Erda is asleep. She is dreaming of the Rhinemaidens who with playful carefreeness guard the Rhinegold. The Nibelung Alberich interrupts their lighthearted game. He yearns for the love of the Rhinemaidens but they mock the dwarf. Foolishly naive, they reveal the secret of the gold which gives absolute power to anyone who renounces love and is thus able to forge the gold into a ring. Fury about love denied drives Alberich to undertake the desperate act: he steals the Rhinegold and renounces love in favour of absolute power. 

Wotan is dreaming of a splendid everlasting life in Valhalla, the castle of the gods, which the giants Fasolt and Fafner have built for him. His wife Fricka is concemed about the price. Wotan has promised the giants the goddess Freia whose apples confer eternal youth. When the giants arrive and demand payment, Wotan refuses to relinquish Freia, thus breaking the agreements. The conflict threatens to escalate. Loge sees an alternative. He tells of Alberich who has forged the Rhinegold into a ring, thirsting to be master of the world with this instrument of power. Even now the Nibelungs are providing him with the most precious of treasures. This awakens the greediness of the giants who would be prepared to exchange Freia for the dwarf's gold. The gods too are fascinated by the concept of absolute power. Wotan accompanies Loge to Nibelheim. 

In the depths of the earth, Alberich is controlling the Nibelungs with force and terror. He forces his own brother Mime to forge a magic helmet, the Tarnhelm, whose power only Alberich knows how to use. Wotan and Loge extract the secrets of the Rhinegold, Ring and Tarnhelm from Mime who is frightened beyond belief. Alberich too succumbs to the cunning Loge. Shamelessly flattering Alberich, he persuades him to demonstrate his power. With the help of the Tarnhelm, Alberich turns himself into a giant dragon and then into a toad. Wotan catches the toad and thus gains control of Alberich. To gain his release, Alberich has to hand over not only the gold but also the Ring to Wotan. He curses the Ring which will bring death to any future owner.

The gold of the Nibelungs does not suffice to release Freia. The giants also demand the Tarnhelm and the Ring but Wotan refuses to relinquish the Ring. Erda warns the god of the consequences of retaining the accursed Ring. Wotan gives it to the giants. Fafner and Fasolt quarrel over the distribution of the treasure. Fafner kills Fasolt and takes away the Ring and the hoard. The gods take possession of Valhalla. Only Loge knows that their pleasure will be shortlived. In vain, the Rhinemaidens ask the gods to return the Rhinegold to them.

Scene 1

At the bottom of the Rhine, the three Rhinemaidens, Woglinde, Wellgunde, and Floßhilde, play together. Alberich, a Nibelung dwarf, appears from a deep chasm and tries to woo them. The maidens mock his advances and he grows angry – he chases them, but they elude, tease and humiliate him. A sudden ray of sunshine pierces the depths, to reveal the Rhinegold. The maidens rejoice in the gold's gleam. Alberich asks what it is. They explain that the gold, which their father has ordered them to guard, can be made into a magic ring which gives power to rule the world, if its bearer first renounces love. The maidens think they have nothing to fear from the lustful dwarf, but Alberich, embittered by their mockery, curses love, seizes the gold and returns to his chasm, leaving them screaming in dismay.

Scene 2

Wotan, ruler of the gods, is asleep on a mountaintop, with a magnificent castle behind him. His wife, Fricka, wakes Wotan, who salutes their new home. Fricka reminds him of his promise to the giants Fasolt and Fafner, who built the castle, that he would give them Fricka's sister Freia, the goddess of youth and beauty, as payment. Fricka is worried for her sister, but Wotan is confident that Loge, the demigod of fire, will find an alternative payment.

Freia enters in a panic, followed by Fasolt and Fafner. Fasolt demands that Freia be given up. He points out that Wotan's authority is sustained by the treaties carved into his spear, including his contract with the giants, which Wotan therefore cannot violate. Donner, god of thunder, and Froh, god of sunshine, arrive to defend Freia, but Wotan cannot permit the use of force to break the agreement. Hoping that Loge will arrive with the alternative payment he has promised, Wotan tries to stall.

When Loge arrives, his initial report is discouraging: nothing is more valuable to men than love, so, there is apparently no possible alternative payment besides Freia. Loge was able to find only one instance where someone willingly gave up love for something else: Alberich the Nibelung has renounced love, stolen the Rhine gold and made a powerful magic ring out of it. A discussion of the ring and its powers ensues, and everyone finds good reasons for wanting to own it. Fafner makes a counter-offer: the giants will accept the Nibelung's treasure in payment, instead of Freia. When Wotan tries to haggle, the giants depart, taking Freia with them as hostage and threatening to keep her forever unless the gods ransom her by obtaining, and giving them, the Nibelung's gold, by the end of the day.

Freia's golden apples had kept the gods eternally young, but in her absence they begin to age and weaken. In order to redeem Freia, Wotan resolves to travel with Loge to Alberich's subterranean kingdom to obtain the gold.

Scene 3

In Nibelheim, Alberich has enslaved the rest of the Nibelung dwarves with the power of the ring. He has forced his brother Mime, a skillful smith, to create a magic helmet, the Tarnhelm. Alberich demonstrates the Tarnhelm's power by making himself invisible, the better to torment his subjects.

Wotan and Loge arrive and happen upon Mime, who tells them of the dwarves' misery under Alberich's rule. Alberich returns, driving his slaves to pile up a huge mound of gold. He boasts to the visitors about his plans to conquer the world using the power of the ring. Loge asks how he can protect himself against a thief while he sleeps. Alberich replies the Tarnhelm will hide him, by allowing him to turn invisible or change his form. Loge expresses doubt and requests a demonstration. Alberich complies by transforming himself into a giant snake; Loge acts suitably impressed, and then asks whether Alberich can also reduce his size, which would be very useful for hiding. Alberich transforms himself into a toad. Wotan and Loge seize him, tie his hands, and drag him up to the surface.

Scene 4

Back on the mountaintop, Wotan and Loge force Alberich to exchange his wealth for his freedom. He summons the Nibelungen, who bring up the hoard of gold. He then asks for the return of the Tarnhelm, but Loge says that it is part of his ransom. Alberich still hopes he can keep the ring, but Wotan demands it, and when Alberich refuses, Wotan tears it from Alberich's hand and puts it on his own finger. Crushed by his loss, Alberich lays a curse on the ring: until it should return to him, whoever possesses it will live in anxiety, and will eventually be robbed of it and killed.

The gods reconvene. Fasolt and Fafner return with Freia. Fasolt, reluctant to release her, insists that the gold be piled high enough to hide her from view. Wotan is forced to relinquish the Tarnhelm, to help cover Freia completely. However, Fasolt spots a remaining crack in the gold, through which one of Freia's eyes can be seen. Loge says that there is no more gold, but Fafner, who has noticed the ring on Wotan's finger, demands that Wotan add it to the pile, to block the crack. Loge protests that the ring belongs to the Rheinmaidens, and Wotan angrily declares that he intends to keep it for his own. As the giants seize Freia and start to leave, Erda, the earth goddess, appears and warns Wotan of impending doom, urging him to give up the cursed ring. Troubled, Wotan calls the giants back and surrenders the ring. The giants release Freia and begin dividing the treasure, but they quarrel over the ring itself. Fafner clubs Fasolt to death. Wotan, horrified, realizes that Alberich's curse has terrible power.

Donner summons a thunderstorm to clear the air, after which Froh creates a rainbow bridge that stretches to the gate of the castle. Wotan leads the gods across the bridge to the castle, which he names Valhalla. Loge does not follow; he says in an aside that he is tempted to destroy the treacherous gods by fire – he will think it over. Far below, the Rhine maidens mourn the loss of their gold, and condemn the gods as false and cowardly.