Dendrites. The problem is dendrites. They’re tiny, nearly microscopic metallic growths on certain materials that occur when the material in question is heated or cooled (for example, during charge/discharge cycles, or by being too close to other hot components in phones/tablets/laptops/etc.). This causes, at least initially, the decrease in battery life and eventual expansion of the battery itself, and can in serious cases cause fires (if the expansion ruptures a cell).

Dendrites also caused the red ring of death on the Xbox 360, and their existence explains why you could fix it by sticking a 360 in the oven - it melted the dendrites that had grown on the solder connecting the BGA-mounted (ball grid array, literally a bunch of tiny balls of solder) CPU to the board. This is a process called “reflowing” and people who are serious about repairing electronics use specialized ovens for such a purpose. Unfortunately there’s no safe way to melt or reduce dendrites in batteries, but there are some promising new anode materials which may help prevent their formation in the first place.

That's unfortunately a side-effect of Li-Ion batteries that's just part of the whole chemistry of the battery. It's literally a case of cramming way too much energy in a way too small space, and the end result is a (comparatively) unstable battery, that will blow out with even the most minor physical damage (that can occur even with just normal discharging/charging if anything goes wrong).