The backpack allows for extra item storage (9 slots), where you can store any item (except for the backpack).
It is based on the Pouch (that gives 3 extra slots), and can be extended to Rucksack (giving 27 extra slots).
The backpack can be used in two ways.
Firstly the storage in the backpack can be accessed by right-clicking while holding the backpack.
Secondly the backpack can be used in the Camping Inventory. When a backpack is placed in the backpack slot of the Camping Inventory, the backpacks inventory will be accessible as extra inventory space thus expanding your basic inventory by 27 slots! This allows for very easy and quick item management.
To craft the backpack a pouch, a string, and five pieces of canvas (which can be acquired through hemp) are needed.