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What Is Non-Circular Definition?

Non-circular definition is a design principle stating that key variables within a system must not reference each other in a self-reinforcing loop. In other words, you should not define variable A using B and simultaneously define B using A, as this creates a logical cycle.

In Web3, this concept often applies to scenarios involving price, collateral ratio, and liquidation rules. For example, if a protocol generates its own price and then uses that price to determine liquidation and issuance, it essentially “self-prices.” When market volatility strikes, such self-referential logic can accelerate risk propagation.

You can think of it like building with blocks: each block should stand independently. If the upper and lower layers depend on each other for support, the entire structure becomes unstable.

Why Does Non-Circular Definition Matter in Web3 Protocols?

Non-circular definition is crucial because circular structures amplify “self-reinforcement.” A decline in one variable can impact another through the feedback loop, which then further suppresses the original variable, triggering a chain reaction.

Historically, the algorithmic stablecoin crisis of May 2022 exposed this vulnerability: stablecoin price anchors depended on the market cap and mint-burn relationship of a related token, creating mutual influence and feedback loops. When the market came under pressure, the mechanism entered a “death spiral.”

In lending protocols, if the price of collateral assets is determined by internal metrics held by borrowers, sharp market swings can trigger mass liquidations and concentrated risk events.

What Is the Principle Behind Non-Circular Definition?

The core principle is to design system dependencies as an acyclic graph. Simply put: list all key inputs by source and ensure these sources do not form cycles.

Implementation includes:

• Independent data sources, such as prices from external market trades.
• Layered rules, with collateral ratios and liquidation thresholds set by static parameters or standalone risk management modules.
• Time separation, using time-weighted average prices to prevent instantaneous volatility from directly triggering critical protocol logic.

This approach makes protocols easier to audit—auditors can trace unidirectional dependency paths without worrying about ending up back at the starting point.

How Is Non-Circular Definition Applied in Stablecoin Design?

Stablecoins aim to maintain price stability and are usually pegged to fiat currencies or a basket of assets. Applying non-circular definition means ensuring “value backing” does not depend on the stablecoin itself.

Typical practices include:

• Using independent reserve assets for collateralization, with reserve valuation sourced from external markets.
• Reserve verification and disclosure by independent third parties.
• Price maintenance mechanisms that avoid using metrics derived from the stablecoin itself.

On the trading layer—such as Gate’s stablecoin pairs—prices are determined by actual order matching and market depth, not by “internal pricing” from issuer contracts. This allows users to see transparent market-driven pricing.

How Is Non-Circular Definition Implemented in DeFi Lending?

In lending protocols, users pledge assets as collateral to borrow other assets, with the collateral ratio defined as “collateral value ÷ loan value.”

Key implementation points:

• Use external trade data as price sources.
• Set liquidation thresholds via risk management modules in advance; do not let them fluctuate based on internal borrower positions.
• Avoid letting borrowed assets influence their own price or liquidation criteria.

For example, when using ETH as collateral to borrow a stablecoin, ETH’s price should come from independent markets and multi-source oracles. Liquidation rules should follow predefined parameters rather than being dynamically rewritten by the stablecoin’s contract during operation.

What Is the Relationship Between Non-Circular Definition and Price Oracles?

Oracles bring off-chain data onto the blockchain, functioning like “reliable thermometers” for real-time external readings. Non-circular definition requires oracle sources to be independent from the system being measured.

In practice, using multi-source data and time-weighted average prices helps minimize manipulation risks. Additional safeguards like anomaly detection and circuit breakers can pause critical operations if prices deviate sharply.

For users, checking whether a project uses decentralized, multi-source oracles provides more trust than relying on self-reported data. In trading scenarios, reference actual market transactions and depth rather than just project-provided indicators.

How Can You Check if a Project Follows Non-Circular Definition?

A quick check involves creating a “dependency diagram”: identify a project’s key inputs (such as price, collateral ratio, liquidation parameters, issuance rules) and see if they reference each other.

Steps:

1. Read documentation and code notes to mark each key variable’s source—especially prices and risk parameters.
2. Draw a simple dependency diagram with arrows indicating “who depends on whom,” and check for arrow loops returning to the starting point.
3. Verify oracle sources and reserve disclosures to confirm data comes from independent external providers and is aggregated from multiple sources.
4. On Gate, review asset trading pairs and market depth to confirm prices are based on actual trades—not internal estimates.
5. Consider historical volatility: if rapid price changes would trigger chain reactions, check for circuit breakers or mitigation mechanisms.

What Risk Mitigation and Limitations Does Non-Circular Definition Provide?

Non-circular definition helps mitigate self-reinforcing risks and reduces “run-on-the-bank” scenarios caused by feedback loops. It improves predictability for liquidation and issuance events and supports easier auditing and regulatory compliance.

Limitations include reliance on external data networks—potentially affecting availability and latency—and sometimes lower capital efficiency due to higher collateral ratios or more conservative parameters.

For regular users, this means a tradeoff: more stability but potentially less aggressive returns. When using Gate for investment or lending, focus on price sources, liquidation rules, anomaly handling, manage positions prudently, and be aware of fund risks.

Practical Steps and Common Pitfalls for Non-Circular Definition

Steps:

1. Draw a dependency diagram listing all key inputs (price, reserves, parameters, governance), with arrows showing dependency direction.
2. Identify cycles—any relationship where “A leads in a circle back to A” must be broken or externalized.
3. Externalize key data sources with multi-source oracles and real transaction data; add time-weighting and anomaly filtering.
4. Use layered architecture: separate risk parameters into independent modules to prevent runtime modifications by endogenous variables.
5. Set up circuit breakers and fallback paths: when data is anomalous or volatility is extreme, pause critical actions or switch to backup rules.
6. Conduct stress tests and audits using historical extreme scenarios to verify no unexpected cycles exist.

Common mistakes include:

• Treating self-reported data as “external sources.”
• Replacing independent data with governance votes (governance is still an internal variable).
• Relying on only one data source.
• Mistaking “algorithmic stability” for true independence when lacking external collateral.

Summary of Non-Circular Definition

Non-circular definition requires structuring key system inputs as independent and acyclic sources. It is especially critical in stablecoin, lending, and oracle contexts—reducing self-reinforcement and chain reaction risks. Best practices include using multi-source external data, layered risk management, circuit breakers, dependency diagram reviews, and stress testing. For users, focusing on the independence of price and rule sources helps clarify risk boundaries; in volatile markets, robust designs ensure more predictable protocol behavior.

FAQ

What Is the Difference Between Non-Circular Definition and Traditional Collateral Requirements in Finance?

Non-circular definition emphasizes asset value independence and traceability, whereas traditional finance often accepts credit-based collateralization. In Web3, non-circular definition requires collateral assets not rely on unverified value promises of other assets—ensuring a clear and credible value chain. This makes DeFi lending more transparent but limits eligible collateral types.

What Happens If a Project Does Not Fully Adhere to Non-Circular Definition?

Projects are exposed to value cycle risks—where multiple assets mutually depend on each other. If any link fails, it triggers cascading failures. Historically, several projects collapsed due to circular dependencies (such as synthetic asset protocols failing during sharp market downturns). Strict non-circular definition significantly reduces systemic risk and user losses.

How Can Beginners Quickly Judge Whether a Token Has a Genuine Non-Circular Foundation?

Check three aspects:

1. The whitepaper should clearly explain token value sources (such as cash flow or governance rights—not vague promises).
2. Trace whether collateral or backing assets originate from independent external sources.
3. On platforms like Gate, review historical performance and community feedback. If value relies entirely on future expectations without substantive backing, proceed with caution.

Does Non-Circular Definition Directly Impact Wallet Security for Regular Investors?

It has an indirect but important effect. Projects adhering to non-circular definition have lower overall risk—reducing the chance your assets are locked in unstable protocols. While risks cannot be entirely eliminated, choosing platforms that strictly implement non-circular definition (like Gate’s reviewed listings) substantially increases fund safety.

How Can New DeFi Projects Use Non-Circular Definition as a Competitive Edge?

New projects can build trust by establishing transparent non-circular value foundations—such as real asset collateralization, publicly auditable reserves, independent third-party verification—demonstrating resilience under stress tests. These projects often attract more risk-averse users and perform more steadily in long-term markets.