The arrival of DeepSeek R1, an AI language model built by the Chinese AI lab DeepSeek, has been nothing less than seismic. The system only launched last week, but already the app has shot to the top of download charts, sparked a $1tn (£800bn) sell-off of tech stocks, and elicited apocalyptic commentary in Silicon Valley. The simplest take on R1 is correct: it’s an AI system equal in capability to state-of-the-art US models that was built on a shoestring budget, thus demonstrating Chinese technological prowess. But the big lesson is perhaps not what DeepSeek R1 reveals about China, but about western neuroses surrounding AI.

For AI obsessives, the arrival of R1 was not a total shock. DeepSeek was founded in 2023 as a subsidiary of the Chinese hedge fund High-Flyer, which focuses on data-heavy financial analysis – a field that demands similar skills to top-end AI research. Its subsidiary lab quickly started producing innovative papers, and CEO Liang Wenfeng told interviewers last November that the work was motivated not by profit but “passion and curiosity”.

This approach has paid off, and last December the company launched DeepSeek-V3, a predecessor of R1 with the same appealing qualities of high performance and low cost. Like ChatGPT, V3 and R1 are large language models (LLMs): chatbots that can be put to a huge variety of uses, from copywriting to coding. Leading AI researcher Andrej Karpathy spotted the company’s potential last year, commenting on the launch of V3: “DeepSeek (Chinese AI co) making it look easy today with an open weights release of a frontier-grade LLM trained on a joke of a budget.” (That quoted budget was $6m – hardly pocket change, but orders of magnitude less than the $100m-plus needed to train OpenAI’s GPT-4 in 2023.)

R1’s impact has been far greater for a few different reasons.

First, it’s what’s known as a “chain of thought” model, which means that when you give it a query, it talks itself through the answer: a simple trick that hugely improves response quality. This has not only made R1 directly comparable to OpenAI’s o1 model (another chain of thought system whose performance R1 rivals) but boosted its ability to answer maths and coding queries – problems that AI experts value highly. Also, R1 is much more accessible. Not only is it free to use via the app (as opposed to the $20 a month you have to pay OpenAI to talk to o1) but it’s totally free for developers to download and implement into their businesses. All of this has meant that R1’s performance has been easier to appreciate, just as ChatGPT’s chat interface made existing AI smarts accessible for the first time in 2022.

Second, the method of R1’s creation undermines Silicon Valley’s current approach to AI. The dominant paradigm in the US is to scale up existing models by simply adding more data and more computing power to achieve greater performance. It’s this approach that has led to huge increases in energy demands for the sector and tied tech companies to politicians. The bill for developing AI is so huge that techies now want to leverage state financing and infrastructure, while politicians want to buy their loyalty and be seen supporting growing companies. (See, for example, Trump’s $500bn “Stargate” announcement earlier this month.) R1 overturns the accepted wisdom that scaling is the way forward. The system is thought to be 95% cheaper than OpenAI’s o1 and uses one tenth of the computing power of another comparable LLM, Meta’s Llama 3.1 model. To achieve equivalent performance at a fraction of the budget is what’s truly shocking about R1, and it’s this that has made its launch so impactful. It suggests that US companies are throwing money away and can be beaten by more nimble competitors.

But after these baseline observations, it gets tricky to say exactly what R1 “means” for AI. Some are arguing that R1’s launch shows we’re overvaluing companies like Nvidia, which makes the chips integral to the scaling paradigm. But it’s also possible the opposite is true: that R1 shows AI services will fall in price and demand will, therefore, increase (an economic effect known as Jevons paradox, which Microsoft CEO Satya Nadella helpfully shared a link to on Monday). Similarly, you might argue that R1’s launch shows the failure of US policy to limit Chinese tech development via export controls on chips. But, as AI policy researcher Lennart Heim has argued, export controls take time to work and affect not just AI training but deployment across the economy. So, even if export controls don’t stop the launches of flagships systems like R1, they might still help the US retain its technological lead (if that’s the outcome you want).

All of this is to say that the exact effects of R1’s launch are impossible to predict. There are too many complicating factors and too many unknowns to say what the future holds. However, that hasn’t stopped the tech world and markets reacting in a frenzy, with CEOs panicking, stock prices cratering, and analysts scrambling to revise predictions for the sector. And what this really shows is that the world of AI is febrile, unpredictable and overly reactive. This a dangerous combination, and if R1 doesn’t cause a destructive meltdown of this system, it’s likely that some future launch will.

• James Vincent was an editor at the Verge, where he specialised in AI, and is the author of Beyond Measure: The Hidden History of Measurement