Understanding Capital Efficiencies in Blockchain

Capital Efficiencies is a ratio that compares the cost of a company’s revenue growth to how much it gets in return in the form of profits.

What is Capital Efficiencies?

In traditional financial systems, capital efficiency is a ratio that compares the cost of a company’s revenue growth to how much it earns in return in the form of profits. In other words, if a company earns $1 for every $1 it spends, the ratio is 1:1. The higher the ratio, the more efficiently a company manages its capital and the higher its profits.

Ensuring capital efficiency helps companies look more closely at their processes and see if there are costs that can be reduced without compromising the quality of performance. Capital efficiency is an important factor for start-up companies. If a company spends too much relative to its growth, it may have difficulty raising funds.

In cryptocurrency, capital efficiency is considered more efficient when using digital assets than fiat because they are generally cheaper to maintain and use than fiat, especially considering the costs of scaling and security over the long term and globally.

One of the key challenges of ensuring an effective capital ratio is the requirement to provide the asset at a 1:1 ratio. Stable coins, such as Tether, often face this problem – the more capital that goes into assets from token buyers, the more collateral is required for the asset. This use of capital is considered inefficient.

Innovations that have emerged in blockchain-based finance are changing the way capital is stored and making it more efficient. Stable coins secured in two ways (collateralized and algorithmically modified) do not require full collateral. Tether, for example, as only some percentage of the coin’s supply needs to be collateralized. Thus, the asset requires fewer dollars for collateral – hence, the money can be used more efficiently. If the US dollar peg is 85% secured only by fiat Stablecoins, the capital efficiency will be 15% higher.