The blanket is a layer surrounding the vessel in a fusion powerplant. It will absorb the energy from the fusion neutrons produced in the plasma, boiling water via a heat exchanger, which will be used to drive a steam turbine and produce electricity.
And what happens to the neutrons after they’re absorbed by the lithium blanket?
The proposal is to embed lithium in the blanket, because that will react with the neutron to produce tritium, which is a fuel for the plasma, along with deuterium. The breeding of tritium occurs through the reaction Li6 + neutron becomes He4 + tritium. This would be advantageous because tritium is radioactive, with a short half-life, and so is difficult and expensive to obtain – it would be far more sensible to manufacture it onsite as a by-product of the fusion process.