Shorted battery. Do not attempt to charge or use--fire may result (google LiPo fires; it's not pretty). Replace battery and dispose of the puffy one.
Later!
--Coop
If the battery was truly shorted, it would have done more than that. I have seen lipos that were shorted out for just a few seconds do this, (on their way to thermal runaway before going critical, but shorting stopped in time), but I do not think the lipo shorted out in the camera.
I own well over 100 lipos of all sizes from 60 mAh single cells to 6 cell 5000 mAh packs. I fly a lot of electric RC aircraft.
The puff is created by O2 gas chemically generated in the pack. It means that the battery has experienced one of the following:
1. It was left fully charged for a long period of time.
2. The battery has aged out after several years.
3. The battery was discharged at a high rate beyond its capabilities.
4. The battery was over discharged below optimum storage voltage of around 3.7-3.8 bolts per cell.
5. The battery was stored in an area with high temps...over room temp to 100 plus degrees, like a garage or a car in the summer.
6. Defects from the factory that reduce normal life.
It is not uncommon for cheap lipos with high internal resistance to puff in a short life of normal use. One common issue that appears to affect this is poor QC at the factory and poor environmental control at the factory.
I have never seen a puffed lipo self destruct just because it was puffed. The vast majority of lipo fires come from impact damage causing internal shorts, overcharging and extended shorting of the leads of more than a moment or two.
I personally have numerous hundreds of flights on slightly puffed lipos. As long as you monitor them for temp after discharge and treat them a little more gently than a normal pack, they are good for many more cycles at slightly less of a discharge rate.
Thoroughly puffed lipos need to be disposed of and not used again.
This battery looks to be pretty thoroughly puffed and should be discharged to zero and disposed of.
Should not be hard to replace the lipo in the camera.