Lithium-rich oxide cathodes lose energy density during cycling due to atomic disordering and nanoscale structural rearrangements, which are both challenging to characterize. Here we resolve the kinetics and thermodynamics of these processes in an exemplar layered Li-rich (Li1.2–xMn0.8O2) cathode using a combined approach of ab initio molecular dynamics and cluster expansion-based Monte Carlo simulations. We identify a kinetically accessible and thermodynamically favourable mechanism to form O2 molecules in the bulk, involving Mn migration and driven by interlayer oxygen dimerization. At the top of charge, the bulk structure locally phase segregates into MnO2-rich regions and Mn-deficient nanovoids, which contain O2 molecules as a nanoconfined fluid. These nanovoids are connected in a percolating network, potentially allowing long-range oxygen transport and linking bulk O2 formation to surface O2 loss. These insights highlight the importance of developing strategies to kinetically stabilize the bulk structure of Li-rich O-redox cathodes to maintain their high energy densities.