The photochemical instability of CdSe nanocrystals coated by hydrophilic thiols was studied nondestructively and systematically in water. The results revealed that the photochemical instability of the nanocrystals actually included three distinguishable processes, namely the photocatalytic oxidation of the thiol ligands on the surface of nanocrystals, the photooxidation of the nanocrystals, and the precipitation of the nanocrystals. At first, the thiol ligands on the surface of a nanocrystal were gradually photocatalytically oxidized using the CdSe nanocrystal core as the photocatalyst. This photocatalytic oxidation process was observed as a zero-order reaction in terms of the concentration of the free thiols in the solution. The photogenerated holes in a nanocrystal were trapped onto the thiol ligands bound on the surface of the nanocrystal, which initiated the photooxidation of the ligands and protected the nanocrystal from any photooxidation. After nearly all of the thiol ligands on the surface of the nanocrystals were converted into disulfides, the system underwent several different pathways. If the disulfides were soluble in water. then all of the disulfides fell into the solution at the end of this initial process, and the nanocrystals precipitated out of the solution without much variation over their size and size distribution. When the disulfides were insoluble in water. they likely formed a micelle-like structure around the nanocrystal core and kept it soluble in the solution. In this case, the nanocrystals only precipitated after severe oxidation, which took a long period of time. If the system contained excess free thiol ligands, they replaced the photochemically generated disulfides and maintained the stability and solubility of the nanocrystals. The initiation stage of the photooxidation of CdSe nanocrystals themselves increased as the thickness and packing density of the ligand shell increased. This was explained by considering the ligand shell on the surface of a nanocrystal as the diffusion barrier of the oxygen species from the bulk solution into the interface between the nanocrystal and the surface ligands. Experimental results clearly indicated that the initiation stage of the photooxidation was not caused by the chemical oxidation of the system kept in air under dark conditions or the hydrolysis of the cadmium-thiol bonds on the surface of the nanocrystals, both of which were magnitudes slower than the photocatalytic oxidation of the surface ligands if they occurred at all. The results described in this contribution have already been applied for designing new types of thiol ligands which dramatically improved the photochemical stability of CdSe nanocrystals with a ligand shell that is as thin as similar to1 nm.