Perlite is a volcanic glass that is heated to about 1000 ºC whereupon it pops much like popcorn and expands to 13 times its former size, resulting in an incredibly lightweight material.
While it does also help retain some water, perlite is primarily used to aerate compost. It excellent for creating a free-draining potting compost for plants that need good drainage, such as cacti and succulents. It can also help create an airy compost for seedlings.
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