Short peptides that fold into β-hairpins are ideal model systems for investigating the mechanism of protein folding because their folding process shows dynamics typical of proteins. We performed folding, unfolding, and refolding molecular dynamics simulations (total of 2.7 μs) of the 10-residue β-hairpin peptide chignolin, which is the smallest β-hairpin structure known to be stable in solution. Our results revealed the folding mechanism of chignolin, which comprises three steps. First, the folding begins with hydrophobic assembly. It brings the main chain together; subsequently, a nascent turn structure is formed. The second step is the conversion of the nascent turn into a tight turn structure along with interconversion of the hydrophobic packing and interstrand hydrogen bonds. Finally, the formation of the hydrogen-bond network and the complete hydrophobic core as well as the arrangement of side-chain–side-chain interactions occur at approximately the same time. This three-step mechanism appropriately interprets the folding process as involving a combination of previous inconsistent explanations of the folding mechanism of the β-hairpin, that the first event of the folding is formation of hydrogen bonds and the second is that of the hydrophobic core, or vice versa.