The advent of all-solid-state thin-film lithium-ion batteries (LIBs) has revolutionized the powering of microsystems due to their miniaturization ease and seamless integration capabilities. Despite the pressing demand for LIBs with higher energy density and enhanced safety, the performance of these devices has been consistently hindered by the complex interfacial dynamics at the cathode|electrolyte boundary. This study delves into the nuanced characterization of transition metal (TM) ions at the cathode|electrolyte interface, utilizing LiNi0.5Co0.2Mn0.3O2 (NCM523) thin films as the cathode material for LIBs. We meticulously explored the profound impact of NCM523|LiPON interfacial properties on the LIBs' overall performance, uncovering that the migration of TM ions and the emergence of TM–O spinel phases, induced by targeted annealing treatments of the cathodes, play pivotal roles in dictating the battery's capacity density and cycling stability. Heat treatments at 600 and 800 °C led to the formation of inhomogeneous spinel-phase nanolayers on the surfaces of NCM523 thin films, which hindered Li+ transport and affected the LIBs. In stark contrast, the 700 °C treatment yielded a pristine layered structure with clear boundary against LiPON, culminating in a battery with outstanding capacity density and remarkable cycle stability. Our theoretical calculations have unraveled that the temperature-dependent migration of TM ions is intricately linked to the varying strengths of TM–O bonds and the associated Jahn-Teller effects, providing a novel perspective on the design of high-performance LIBs.