Loki’s cutting of Sif’s hair begins a chain of events that produces several of the gods’ most famous treasures. The episode is told in Snorri Sturluson’s Skáldskaparmál. It is a medieval Icelandic prose account built around older poetic language, not a record of one unified Norse scripture.
The threat and the bargain
Loki secretly cuts Sif’s hair. Thor threatens to break every bone in Loki’s body unless he repairs the harm. Loki goes to the sons of Ivaldi, dwarven smiths who make new hair of gold that will grow like natural hair, along with Odin’s spear Gungnir and Freyr’s ship Skíðblaðnir.
A wager with Brokkr
Loki then wagers his head that Brokkr’s brother Eitri, also called Sindri in some manuscripts, cannot match the first set. Despite Loki interfering in the form of a fly, the smith makes the boar Gullinbursti, the ring Draupnir, and Thor’s hammer Mjölnir.
Why the hammer has a short handle
The fly bites the worker tending the bellows, causing a brief interruption while Mjölnir is forged. The gods judge the hammer the finest gift because it can protect them from giants, though its handle is short. Loki avoids losing his head through wordplay but has his lips sewn shut.