Dioxygenases catalyze stereoselective oxygen atom transfer in metabolic pathways of biological, industrial, and pharmaceutical importance, but their precise chemical principles remain controversial. The α-ketoglutarate (αKG)-dependent dioxygenase AsqJ synthesizes biomedically active quinolone alkaloids via desaturation and subsequent epoxidation of a carbon-carbon bond in the cyclopeptin substrate. Here, we combine high-resolution X-ray crystallography with enzyme engineering, quantum-classical (QM/MM) simulations, and biochemical assays to describe a peroxidic intermediate that bridges the substrate and active site metal ion in AsqJ. Homolytic cleavage of this moiety during substrate epoxidation generates an activated high-valent ferryl (FeIV = O) species that mediates the next catalytic cycle, possibly without the consumption of the metabolically valuable αKG cosubstrate. Our combined findings provide an important understanding of chemical bond activation principles in complex enzymatic reaction networks and molecular mechanisms of dioxygenases.