A surprisingly efficient and powerful Chinese AI model has taken the technology industry by storm.

It’s called DeepSeek R1, and it’s rattling nerves on Wall Street.

The new AI model was developed by DeepSeek, a startup that was born just a year ago and has somehow managed a breakthrough that famed tech investor Marc Andreessen has called “AI’s Sputnik moment.”

R1 can nearly match the capabilities of its far more famous rivals, including OpenAI’s GPT-4, Meta’s Llama and Google’s Gemini — but at a fraction of the cost.

The company said it had spent just $5.6 million powering its base AI model, compared with the hundreds of millions, if not billions of dollars US companies spend on their AI technologies.

That’s even more shocking when considering that the United States has worked for years to restrict the supply of high-power AI chips to China, citing national security concerns.

That means DeepSeek was supposedly able to achieve its low-cost model on relatively under-powered AI chips.

What is DeepSeek?

The company, founded in late 2023 by Chinese hedge fund manager Liang Wenfeng, is one of scores of startups that have popped up in recent years seeking big investment to ride the massive AI wave that has taken the tech industry to new heights.

Liang has become the Sam Altman of China — an evangelist for AI technology and investment in new research. His hedge fund, High-Flyer, focuses on AI development.

Like other AI startups, including Anthropic and Perplexity, DeepSeek released various competitive AI models over the past year that have captured some industry attention.

Its V3 model raised some awareness about the company, although its content restrictions around sensitive topics about the Chinese government and its leadership sparked doubts about its viability as an industry competitor, the Wall Street Journal reported.

But R1, which came out of nowhere when it was revealed late last year, launched last week and gained significant attention this week when the company revealed to the Journal its shockingly low cost of operation.

And it is open-source, which means other companies can test and build upon the model to improve it.

The DeepSeek app has surged on the app store charts, surpassing ChatGPT Monday, and it has been downloaded nearly 2 million times.

Why is DeepSeek such a big deal?

AI is a power-hungry and cost-intensive technology — so much so that America’s most powerful tech leaders are buying up nuclear power companies to provide the necessary electricity for their AI models.

Meta last week said it would spend upward of $65 billion this year on AI development. Sam Altman, CEO of OpenAI, last year said the AI industry would need trillions of dollars in investment to support the development of high-in-demand chips needed to power the electricity-hungry data centers that run the sector’s complex models.

So the notion that similar capabilities as America’s most powerful AI models can be achieved for such a small fraction of the cost — and on less capable chips — represents a sea change in the industry’s understanding of how much investment is needed in AI.

The technology has many skeptics and opponents, but its advocates promise a bright future: AI will advance the global economy into a new era, they argue, making work more efficient and opening up new capabilities across multiple industries that will pave the way for new research and developments.