Lanolin is a greasy yellow substance made from secretions (sebum) from the skin glands of sheep to condition their wool. It is a natural, animal-derived by product harvested from shorn wool. Lanolin is a long-chain waxy ester that contains cholesterol, but with a different composition than human sebum.
The molecule 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 sheep's wool) with emollient properties. Its emollient properties soften and heal aggravated areas while forming an oily 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.