Defects and their interactions in crystalline solids often underpin material properties and functionality as they are decisive for stability, result in enhanced diffusion, and act as a reservoir of vacancies. Recently, lithium-rich layered oxides have emerged among the leading candidates for the next-generation energy storage cathode material, delivering 50 % excess capacity over commercially used compounds. Oxygen-redox reactions are believed to be responsible for the excess capacity, however, voltage fading has prevented commercialization of these new materials. Despite extensive research the understanding of the mechanisms underpinning oxygen-redox reactions and voltage fade remain incomplete. Here, using operando three-dimensional Bragg coherent diffractive imaging, we directly observe nucleation of a mobile dislocation network in nanoparticles of lithium-rich layered oxide material. Surprisingly, we find that dislocations form more readily in the lithium-rich layered oxide material as compared with a conventional layered oxide material, suggesting a link between the defects and the anomalously high capacity in lithium-rich layered oxides. The formation of a network of partial dislocations dramatically alters the local lithium environment and contributes to the voltage fade. Based on our findings we design and demonstrate a method to recover the original high voltage functionality. Our findings reveal that the voltage fade in lithium-rich layered oxides is reversible and call for new paradigms for improved design of oxygen-redox active materials.