AbstractNa‐ion batteries (NIBs) have received considerable attention as promising alternatives to lithium‐ion batteries, particularly for low‐speed electric vehicles and large‐scale energy storage applications. Currently, layered oxide compounds are considered the most important cathode materials for NIBs. However, they suffer from reduced capacity and a shortened lifespan when exposed to water vapor during storage or battery assembly. This article elaborates on the structural and chemical evolution of NaNi1/3Fe1/3Mn1/3O2 (NFM) cathode at the atomic scale in a pure water vapor environment. The Na+/H+ exchange induces the formation of a spinel‐like phase via a multi‐site nucleation mechanism. This transition preferentially occurs either at the cathode surface or along planar defects such as twin boundaries and grain boundaries. Additionally, numerous microcracks perpendicular to <003> direction appear inside NFM grains, further exacerbating the structural deterioration. Upon prolonged exposure to water vapor, NFM grains decompose into a mixture of Na2O and transition metal oxide nanoparticles (FeO, NiO, and MnO), accompanied by the generation of oxygen gas. This research provides a comprehensive atomic‐scale insight into the water vapor instability mechanism of layered oxide cathodes, offering guidance for the design and manufacture of the next generation of water vapor‐tolerant layered oxide cathodes in NIBs.