You know how a wool sweater can felt? It shrinks and loses it's ability to stretch? That's the same principle. By stabbing the wool you are actually getting the individual hairs to lock together because they have scales. The needle you use is actually not just any needle but it is designed to create as much disorder and compression as possible (so typically it's actually 3 or more needles).

It's called felting. It's just condensing all the hairs together. They have to be coarse enough to bind to each other

Fun fact, you can felt dog hair but not cat hair

Do you know what the insanity is? Yes, you know...