Those are LEDs on DIY circuitboards weaved into a patch of cotton. The hand loom it was made on was laser cut, gifted to me by Walter Gonzales of Fab Lab Lima (Thanks, Walter!). Stainless Steel is used as a warp thread and can provide power to light up the LEDs, controlling each row individually.
The cooler part is that with Arduino, you can write a program that switches these threads from output to input very quickly. This means that each thread can act as a touch sensor (Like the Celestial Celeste) but if touch is detected, electricity can immediately be output down the same thread.
I’ve got a video of plain steel thread acting as a touch sensor (this is the Makey Makey method of using a large pull-up resistor and detecting when the sensor pin becomes grounded via your skin).
Unfortunately, I didn’t use LEDs with built in resistors (like the Adafruit sewable LEDs) so I can’t power them with 5V directly. Long story short, the detection circuit becomes more complicated if I have to use resistors before the output. Another option I’ve yet to try is detecting and powering the LEDs with an Arduino running at 3.3V (like the Adafruit Floras).
10/11/15 Update: Got it blinking with a Flora. Will probably have to mill my own board to integrate the resistors needed to sense touch and power LEDs. Or I could probably solder megaohm resistors to these same LEDs boards and weave them in…