Capital Efficiencies

November 21, 2023 - Around 3 mins mins to read

Understanding Capital Efficiencies

Capital efficiencies refer to the comparison between a company’s spending on revenue growth and the resulting profits. The ratio of spending to earnings determines how capital efficient a company is. For example, if a company earns $1 for every $1 spent, it has a 1:1 ratio. A higher ratio indicates greater capital efficiency and higher profits.

Examining capital efficiency allows companies to identify potential cost reductions without compromising operational quality. Startups, in particular, need to prioritize capital efficiency as excessive spending relative to growth can hinder fundraising efforts.

In the realm of cryptocurrency, capital efficiency is often achieved more effectively with digital assets compared to fiat money. Digital assets are generally cheaper to maintain, utilize, process, and send, especially when considering long-term scalability and security on a global scale.

Regardless of whether it involves fiat or crypto, maintaining an efficient capital ratio poses challenges, particularly when it requires a 1:1 backing of an asset. Stablecoins like Tether face difficulties as the need for collateral backing increases with more capital from token buyers. This situation is considered capital inefficient.

The emergence of blockchain-based finance innovations is revolutionizing capital efficiency. Stablecoins that are backed by collateral and algorithmic modifications do not require full collateral backing like Tether. Only a certain percentage of the supply needs to be collaterally backed, allowing for more efficient use of capital. For instance, if a $1 peg can be maintained with only 85% of it backed by fiat stablecoins, the capital efficiency increases by 15%.

Author: Travis Moore, CTO of Frax

Bio: Travis Moore is an angel investor, programmer, entrepreneur and the CTO of Frax, the world’s first fractional algorithmic stablecoin that is partially backed by collateral and stabilized algorithmically. Frax is open-source and permissionless, bringing a truly trustless, scalable and stable asset to the future of decentralized finance. Moore is also co-founder of the blockchain-based knowledge base, Everipedia. Moore has a triple-major from UCLA in Neuroscience, Biochemistry, and Molecular, Cell, & Developmental Biology. His passions are artificial intelligence and blockchain technology, which he believes are the two industries that will impact the world the most in the coming decade.