Knitting Daily has a great article on how to choose the right yarn for your felting projects.
From the article:
Sheep and other animal fibers are scaly–picture a fish’s scales covering each fiber. When you dunk wool into hot water and swish it around, these scales open up, sort of like lots of little umbrellas opening up all along the length of the fiber. When they open up, the scales catch onto nearby scales and grab on. The more fibers you have, and the more you rub the fibers around, the more scales there are to catch onto each other. The fibers get all tangled up, and more scales grab tight, until you have felt.
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