Why Formation Is Betting On Onchain Credit | Luke Truitt

Formation combines Orca’s trading and secondary-market capabilities with LoopScale’s credit and vault products. The teams had worked closely for about five years, sharing users and issuers, before their collaboration deepened over the past year. Luke Truitt sees onchain credit as Formation’s largest opportunity over the next two to three years: rather than relying only on growth in spot assets, the platform wants to create more ways to earn yield from each asset. Credit can also provide steadier, recurring revenue to balance trading’s cyclical income.

Secondary markets could help credit grow by making it easier to liquidate assets and unwind leveraged positions. LoopScale’s private-credit fund market had reached roughly $10–12 million in deposits, but Truitt said limited liquidity constrained it; potential solutions include AMMs, RFQs, and proprietary AMMs, even for illiquid assets. ONYC was LoopScale’s second-largest market after USDC, and USDC lending rates against it were about 1–2 percentage points above standard USDC rates. Users can loop ONYC for leveraged exposure or lend against it for senior exposure, but claims against ONYC introduce derivative risk that could leave depositors exposed if the underlying claim fails.

Formation is focused on distributing originators’ products through its yield network, not originating loans itself in the near term. Its Don product finances telecom infrastructure through an off-chain book and a LoopScale-powered vault, making the composition of yield more visible than simply putting a yield token into DeFi. Truitt sees fully onchain loan-level allocations and payouts as a gradual goal because legal and structural issues remain. He also argues that lower fixed structuring and operating costs could make smaller financings viable, including neocloud loans of $10 million, $20 million, or $50 million to borrowers willing to pay 14%, 16%, or 20% for capital. Onchain payment visibility could similarly support lending against remittances and trade payments, with repayment tied to incoming cash flows, though Formation currently lacks an origination wedge in trade finance.

Truitt says compliance and risk perception have kept traditional capital markets apart from DeFi, whose products have operated in regulatory gray zones for five to six years. Formation is taking a regulatory-forward approach that includes licensing, disclosures, KYC, and AML, while tracking the Clarity Act, Regulation Crypto, and other proposals. The company sees risks across the full asset chain, including smart-contract failures, oracle mismatches, counterparties, and off-chain asset failures. Truitt argues DeFi yields are underpriced relative to those risks: stablecoin lending capital has shrunk over the past year as users compared DeFi risk with alternatives, and a roughly 7% DeFi lending yield may not sufficiently compensate users when a Charles Schwab account offers about 6%. Delayed settlement and deposit, withdrawal, or token-level flow caps might reduce some concerns, but tail risks may remain difficult to model.

Orca’s integrated stack can help launch assets, provide initial liquidity, and build looping markets, using its balance sheet, reputation, integrations, and LP relationships to attract depositors. Truitt says lending capital is harder to scale than demand for looping: stablecoin lenders must accept smart-contract risk for yields around 6–7%, and Orca might supply the first $20 million before another platform brings in $50 million or $100 million from deeper pools. He expects more bespoke rather than copy-paste markets over the next three years, including markets of roughly $5 million, $10 million, or $20 million across about 100 assets. Orca describes itself as a market-structure company, using AMMs, RFQs, and proprietary market making according to what suits each asset.

Formation’s revenue model reflects a trade-off between distributing value and investing to grow. LoopScale charged no take rate on lending markets, so trading revenue could help subsidize credit-side growth, especially in active markets. Truitt sees clearer monetization in risk-related services such as market making, vault management, and liquidations, as well as in issuer relationships and bringing distinctive assets to market. He favors reinvesting revenue in product development, hiring, partnerships, and marketing rather than routinely distributing it through token buybacks; distributing 50% of revenue, rather than profit, would make long-term planning difficult for an early-stage company. The merger placed both companies’ capital stacks and IP under one umbrella, while LoopScale’s lack of a live token simplified some aspects. Orca’s token is not stock, and Truitt says major changes affecting token-holder value would still require ratification. He sees traditional-market integration, if enabled by regulatory clarity, as a difficult but potentially transformative route for bringing off-chain assets, capital, and yields onchain.