Lithium iron phosphate (LiFePO₄, LFP) is regarded as a promising cathode material for aqueous lithium-ion batteries (ALIBs) due to its excellent structural stability and intrinsic safety. However, when operated in aqueous electrolytes, LFP suffers from more severe capacity decay and poorer cycling stability than those in non-aqueous systems. Recent studies have revealed that LFP degradation in aqueous system arises from several coupled processes, including electrolyte decomposition at high potentials, Fe dissolution and impurity-ion intercalation, lattice distortion during repeated Li⁺ insertion/extraction, and unstable interfacial passivation. Electrolyte decomposition induces local pH fluctuations and interfacial reconstruction, which exacerbate transition metal leaching and lattice degradation, the resulting structural defects and freshly exposed surfaces in turn accelerate further interfacial side reactions. These processes collectively lead to active-material loss, sluggish ion transport, and aggravated polarization. To address these failure pathways, this review summarizes current stabilization strategies, including elemental doping, surface coating, morphological regulation, and modification of electrolytes. The underlying mechanisms are analyzed from the perspectives of thermodynamic stability, interfacial kinetics, and solvation-structure regulation. Finally, future research directions, including in situ characterization, multiphysics coupled modeling, and low-cost electrolytes with high-salt effects, are discussed to provide guidance for the mechanism-driven design of high-performance aqueous cathode materials.