Recent studies have shown that water absorption changes the mechanical and transport properties of Nafion by orders of magnitude. The unusually large changes in properties are indicative of microstructural changes induced by water absorption. The experimental findings of changes in proton conduction, water transport, elastic modulus, and stress relaxation are highlighted and explained by microphase segregation of hydrophilic domains resulting from water absorption. Water absorption is proposed to cause clustering of hydrophilic sulfonic acid groups and water within a hydrophobic polytetrafluoroethylene matrix. The hydrophilic domains form a network that facilitates transport and create physical cross-links that stiffen Nafion. At high temperature and low water activity, the entropy of de-mixing breaks the clusters apart, causing a large drop in elastic modulus of the polymer and a large decrease in the rates of water and proton transport.