Watch poemtoahorse, zoom 3.
Pretty cool stuff, zoom3 is a 64KB intro containing about 80,000 vertices and 150,000 faces - or about 4MB of uncompressed 3-D data - in 10KB. (That is according to the end-scroller, and I believe it is true.) poemtoahorse is pretty much the same kind of thing, except that they use more organic shapes.
The idea is pretty cool - instead of storing thousands of vertices and faces, you start with primitives and then store only the instructions necessary to shape the primitive into its final form. It's the same idea as storing a picture as a series of vectors, rather than pixel-by-pixel. I am referring to it here as parametric deformation modelling for lack of a better name. It can be used to create pretty much any shape you can imagine.
I realize there are probably two main objections to this.
First: The models compress extremely well (obviously) but they still have to be unpacked, rendered into their many-vertices final forms, and then finally sent to our video cards. This could slow things down considerably. I am aware of that. This is a suggestion for something LL might like to do at some point in the future, when it won't be such a burden on the average hardware. (Then of course you have ActiveWorlds, where people already have models with thousands of vertices, and it seems to work fine, so maybe it isn't that much of a burden after all.) As far as the physics engine is concerned, we don't have to have it collide every last face, we can use bounding boxes to approximate it.
Second: Won't work with 3DS etc. Well, I don't think LL wants to encourage people to build outside the game, so I don't know that they would care. We'll be lucky if we see an external avatar skinner, and that's probably driven more by people being tired of wasting hundreds of L$ trying to get a shirt to look right. I suppose this idea could be compatible with external parametric modellers if they use this particular method, but probably not 3DS and others that like to store vertices and faces instead.
Now on to advantages. This could be made to work with the current modelling system, sitting right on top of the primitive types we already have. It would also fit with the in-world building aspect that LL seems interested in. And, of course, the #1 advantage is that it would allow us to build better-looking objects.