This is a perfect illustration of why government direction of labor towards productive purposes is essential and why this task cannot be left up to the markets.

The government started to crack down on the quant trading industry amid economic slowdown in an effort to move the economy away from the financial sector and towards manufacturing.

High-Flyer was one of the quant traders that was facing extinction. Instead of giving up, they spun out Deepseek, an AI lab using their existing talent and 10k GPUs they were already using for trading. They didn’t even need any VC funding.

DeepSeek also proves you don’t need billions in funding, as it’s being developed on the cheap compared to commercial models like ChatGPT. The team is able to produce a cutting edge model using a fraction of the resources its competitors need.

DeepSeek approach fundamentally changes the economics of the market and makes OpenAI’s strategy obsolete.

Scores of projects are starting to use DeepSeek model which leads to an ecosystem being formed around it, turning it into a standard setter. The model is open and free for anyone to use making it more appealing to both public and private enterprise, and it don’t require massive data centers to operate. While large versions of the model still need significant infrastructure, smaller versions can run locally and work well for many use cases.

Another aspect of open source nature is that it amortizes the development effort. The whole global community of researches and engineers can contribute to the development of the model. On the other hand, OpenAI has to pour billions into centralized infrastructure and do all the research to advance their model on their own.

The competition here is between two visions for how AI technology will be developed going forward. DeepSeek’s vision is to make AI into an open source commodity that’s decentralized and developed cooperatively. OpenAI vision is to build and expensive closed system that they can charge access for.

Traditionally, open source projects that manage to gain significant momentum have always outcompeted closed source software, and I don’t see why this scenario will play out any different. This calls into question the whole $500bn investment that the US is doing into the company. The market will favor cheaper open model that DeepSeek is building, and it will advance faster because it has a lot more people contributing to its development.

And looping back to the initial point, DeepSeek would not have existed if the government in China didn’t crack down on trading industry which redirected labor towards productive endeavours.