The Effect of AMMs on Price Bubble Formation in Cryptocurrency Markets under Proof-of-Work and Proof-of-Stake

Abstract

This paper investigates how blockchain consensus mechanisms and market mechanisms of liquidity provision affect price bubble formation in cryptocurrency markets. Specifically, we compare Proof-of-Work (PoW) and Proof-of-Stake (PoS) under two trading environments: a Limit Order Market (LOM) and an Automated Market Maker (AMM). We conduct a controlled laboratory experiment following a 2×2 between-subject design, generating four treatments: PoW-LOM, PoW-AMM, PoS-LOM, and PoS-AMM. Market outcomes are evaluated using standard bubble measures, including RD, RAD, RDMAX, AMPLITUDE, and CRASH. The results show that AMM-based markets exhibit weaker bubble dynamics than LOM-based markets, with lower mispricing, smaller peak overvaluation, and less severe crashes. By contrast, the results do not support the hypothesis that bubble formation is lower under PoS than under PoW. Instead, in the experimental setting, PoS treatments display stronger bubble patterns than PoW treatments. Overall, our results show that the institutional design of cryptocurrency markets plays an important role in shaping speculative price dynamics and market stability.