The first two steps of the Wacker process are studied using a density functional method and a variety of chemical models. These two steps are, first, the nucleophilic addition of an hydroxyl group to an ethylene coordinated to palladium dichloride and, second, the beta-elimination step leading to a pi-coordinated vinyl alcohol complex. The most important result is found for the nucleophilic addition step. It is shown that the nucleophile should be modeled by a chain of water molecules. At least three water molecules are needed to bridge from the point of attack on the olefin to the negative chloride ligand. The H5O2+-Cl- ion pair is formed simultaneously as the nucleophilic addition occurs in a conceited way with a low barrier. Since a charge separation occurs in this step, solvent effects are quite important. This is also true for the second step of the process where beta-elimination occurs, since in this step a negative chloride is moved away from the positive palladium atom in order to make place for the hydride. When very large basis sets are used and solvent effects are accounted for, good agreement with what is known experimentally is found.