As Caliban, Trinculo, and Stephano walk through the island drinking, Caliban proposes to Stephano that he can become king of the island if he kills Prospero. In that case, Caliban says, Trinculo "shalt be lord of it, and I'll serve thee." Stephano asks how it will be "compassed," and Caliban replies, "I'll yield him thee asleep." In other words, Caliban will present Prospero to Stephano while Prospero takes his afternoon nap. First, Caliban explains, they must take possession of all Prospero's books and burn them. Without his books, Prospero is "but a sot, as I am," and is unable to control the spirits of the island. This suggests Caliban has attempted to take Prospero's life before, unsuccessfully; he now hopes that Stephano will accomplish the deed. If not, Stephano, not Caliban, will suffer the onslaughts of the spirits.
Caliban attempts to further motivate Stephano to make the attack by telling him that when he has killed Prospero, he will have all Prospero's "brave utensils," that is, his splendid household goods. Not only that, he will take possession of Miranda, who is "a nonpareil." Stephano likes that idea, imagining himself and Miranda as king and queen of the island.
Caliban suggests three possible ways of murdering Prospero. First, Stephano can "brain him," battering his skull with a log. This is a play on words; previously Trinculo had admitted that the three of them were fools, and that "if th' other two be brained like us, the state totters." Caliban's other suggestions are to "paunch him with a stake," that is, stab him in the belly, or to "cut his weasand with thy knife," or slice his throat (windpipe).
The dramatic irony of the scene is that Ariel is present and listening to the plot. He states in an aside, "This will I tell my master."