Lanolin is a natural, animal-derived byproduct harvested from shorn wool. The molecular structure of lanolin mimics human skin lipids. And because of its high fat content, lanolin is occlusive, meaning it prevents the evaporation of water from the skin (transepidermal water loss). This keeps skin moisturized and helps the skin heal.
Though it can get a bad rap for coming from an animal source, lanolin itself is nothing more than a natural substance (extracted from sheeps' wool) with emollient properties. Those emollient properties soften and heal aggravated areas while forming a protective layer on the top of the skin that traps water to prevent moisture loss. This is because, unlike Vaseline and other petroleum-based emollients, lanolin forms a non-occlusive barrier on skin, which means it doesn't smother skin.