Nacre is a natural nanocomposite material with superior mechanical strength and toughness. What roles do the nanoscale structures play in the inelasticity and toughening of nacre? Can we learn from this to produce nacre-like nanocomposites? Here we report in situ dynamic atomic force microscope observations of nacre with aragonite nanograins (nanoparticles) of an average grain size of 32 nm, which show that nanograin rotation and deformation are the two prominent mechanisms contributing to energy dissipation in nacre. The biopolymer spacing between the nanograins facilitates the grain rotation process. The aragonite nanograins in nacre are not brittle but deformable.