Possible reaction pathways for papain-catalyzed hydrolysis of N-acetyl-Phe-Gly 4-nitroanilide (APGNA) have been studied by performing pseudobond first-principles quantum mechanical/molecular mechanical-free energy (QM/MM-FE) calculations. The whole hydrolysis process includes two stages: acylation and deacylation. For the acylation stage of the catalytic reaction, we have explored three possible paths (A, B, and C) and the corresponding free energy profiles along the reaction coordinates. It has been demonstrated that the most favorable reaction path in this stage is path B consisting of two reaction steps: the first step is a proton transfer to form a zwitterionic form (i.e., Cys-S-/His-H+ ion-pair), and the second step is the nucleophilic attack on the carboxyl carbon of the substrate accompanied by the dissociation of 4-nitroanilide. The deacylation stage includes the nucleophilic attack of a water molecule on the carboxyl carbon of the substrate and dissociation between the carboxyl carbon of the substrate and the sulfhydryl sulfur of Cys25 side chain. The free energy barriers calculated for the acylation and deacylation stages are 20.0 and 10.7 kcal/mol, respectively. Thus, the acylation is rate-limiting. The overall free energy barrier calculated for papain-catalyzed hydrolysis of APGNA is 20.0 kcal/mol, which is reasonably close to the experimentally derived activation free energy of 17.9 kcal/mol.