Felt is basically tangled fibres. It can occur naturally, given the time, but what we usually call felting is encouraging the fibres to tangle and stay pressed together. When working with wool there are two main ways: dry felting and wet felting.
Dry felting is done with the help of special needles that pull the fibres when you poke. It’s also called needle felting.
Wet felting encourages the wool to shrink and tangle by friction with warm water and soap.