<p>Direct recycling of spent lithium-ion batteries is an essential approach to address challenges related to energy security and resource sustainability. However, previous direct recycling methods could only restore spent electrode materials to their original state, limiting their ability to meet rapidly advancing performance benchmarks. Herein, we present a promising upcycling strategy that reconstructs degraded ternary layered positive electrode materials into Li-rich oxides, thereby achieving with substantial capacity advantages. Microstructure characterizations and theoretical calculations demonstrate that intrinsic vacancy defects in the degraded materials provide energetically favorable atomic-scale diffusion pathways for exogenous lithium-ions, mediating the conversion of the layered R-3m structure into the C2/m phase and the formation of Li₂TMO₃-type domains. With activated anion redox reactions, it attains a specific capacity increase from 100 to over 274 mAh g⁻¹ at 0.1 C and maintains 92.5% capacity retention over 300 cycles at 0.5 C. The strategy has been scaled to kilogram-level production, achieving a specific energy of 377 Wh kg⁻¹ in a 14 Ah-level pouch cell. This result validates the upcycling approach, bridging laboratory research and industrial manufacturing of high-energy-density batteries via sustainable recycling.</p>