Peptidyl asparaginyl ligases (PALs) are powerful tools for peptide macrocyclization. Herein, we report that a derivative of Asn, namely Nγ‐hydroxyasparagine or Asn(OH), is an unnatural P1 substrate of PALs. By Asn(OH)‐mediated cyclization, we prepared cyclic peptides as new matrix metalloproteinase 2 (MMP2) inhibitors displaying the hydroxamic acid moiety of Asn(OH) as the key pharmacophore. The most potent cyclic peptide (Ki=2.8±0.5 nM) was built on the hyperstable tetracyclic scaffold of rhesus theta defensin‐1. The Asn(OH) residue in the cyclized peptides can also be readily oxidized to Asp. By this approach, we synthesized several bioactive Asp‐containing cyclic peptides (MCoTI‐II, kB2, SFTI, and integrin‐targeting RGD peptides) that are otherwise difficult targets for PAL‐catalyzed cyclization owing to unfavorable kinetics of the P1‐Asp substrates. This study demonstrates that substrate engineering is a useful strategy to expand the application of PAL ligation in the synthesis of therapeutic cyclic peptides.