In Vanaheim the Vanir dwell - the syncretically absorbed gods of a long-vanished culture,
I suspect, and friends of the Aesir, who are the true gods of the Northmen. But they
were not always on peaceful terms - indeed, the first war ever fought was said to be
between these pantheons, over the hospitality that the Aesir had shown to the witch
Gullveig, whose evil magic had an unsavory reputation.
Though Odin cast the first spear, the Vanir met with great success initially, and their battle spells shattered Asgard's high walls. But the tide turned, and soon Vanaheim's walls had also been destroyed; and the battle raged on inconclusively, until both sides were exhausted from fighting and desired peace.
It was agreed that they should live in harmony, and they exchanged hostages to guarantee this arrangement. Those sent to the Aesir - Njord and his son Freyr, and Njord's daughter Freyja, and the wise Kvasir (though another tale describes his origin differently) - taught them rites of sacrifice and arts of witchcraft. Those sent to the Vanir - strong Honir and wise Mimir - seemed infallible leaders, and all seemed quite content with the outcome of things.
But the Vanir grew tired of Honir's leadership, and began to suspect that they had gotten the worst of the arrangement; for with Mimir at his side, he gave shrewd advice, but without him, he was helpless, and could only defer to the judgment of others. Outraged, they chopped off Mimir's head and had it sent to Odin in a bucket. I consider this rather an unwise decision, since they had with one stroke rendered both of their hostages useless to them, but such is the power of anger to unhinge even gods' minds.
The Allfather was determined to make the best of the situation, and though he had lost Mimir's body, he did not wish to also lose his counsel. He had the head pickled and charmed it to return to it the power of speech, and had it placed by what is now called the Spring of Mimir, where Yggdrasil's roots touch Midgard. There it remains, a sort of Orpheus, whispering its advice in Odin's ear when he seeks it; and there it will remain 'till Ragnarok.