The capacity loss rate of LiFePO4 in aqueous electrolyte was found to be much faster than it in organic electrolyte. The cycling stability in aqueous electrolyte with various dissolved oxygen content and pH value was extensively studied by cyclic voltammetry. It was found that both high OH− and dissolve O2 content can accelerate the cycling fading of LiFePO4. It has been proved that the capacity fading of LiFePO4 is due to not only chemical instability but also electrochemical instability. Mössbauer spectroscopy demonstrated that the Fe(III)-containing species was formed in the active materials arisen from the irreversible side reaction. The carbon-coated LiFePO4 prepared by chemical vapor decomposition method shows significantly improvement in cycling stability. The carbon coating technology provides an effective approach to enhance cycling performance in aqueous electrolyte as well as proof of proposed fading mechanism.