Felted bags are made with 100% wool! NON-SUPERWASH - if you're unfamiliar with the superwash treatment, it basically removes the scales from wool yarn so that the yarn won't felt. But if you use a 100%, regular, non-superwash wool, you knit the bag at a loose gauge (I'm using US 10.5 needles with worsted weight yarn), then when the knitting is done you chuck it into the washing machine on HOT with some jeans or towels. The fibers will rub against each other and felt. Technically, this process is called "fulling" not felting, but I just call it felting because the end result is basically, well, thick felted fabric!

Here's one of my Ravelry project pages for a previous bag I did, with a picture of the finished bag. Sadly I don't have a "before" picture but I assure you it just looked like regular knitted fabric before chucking it in the wash: https://ravel.me/xnera/gfb

If you or anyone else wants the recipe I use for knitting these bags, I'd be glad to share it!