Formulas are used in Alchemy to create new items that you can wear or use as ingredients for more complex formulas.
Formulas are found by defeating monsters within zOMG! as well as the Marketplace.
Items created via formulas are not bound to your character. They can be traded in the marketplace or gifted to friends.
To make Formulas you have to go under SHOPS > ALCHEMY. You must have all the ingredients to complete the formula. You can get ingredients in the marketplace or from fighting Animated.