The game consists of two parts: a pin-merging puzzle at the bottom and a knitting puzzle at the top. To begin, focus on the bottom puzzle. Drag and drop pins of the same color onto each other to merge them. Some pins have a number (e.g., "3"), which indicates you must merge that many pins of the same color into it to clear it. Successfully clearing a set of colored pins generates a spool of yarn of that same color. Once a yarn spool appears, tap on it and then tap on the corresponding colored squares in the knitting grid at the top to connect the thread. Continue clearing pins to generate all the necessary yarn colors. Fill in all the colored squares in the top grid to complete the level.
This is an "EXTREME LEVEL," which suggests the puzzle requires careful planning and a specific order of operations to solve. There does not appear to be a time limit for the level or a penalty for incorrect moves, as indicated by the infinite lives symbol. You cannot complete the top knitting puzzle without first solving the bottom pin puzzle to generate the required yarn spools.
Prioritize solving the pin-merging puzzle, as it is the source of your materials for the main objective. Strategically decide which color pins to clear first to get the yarn spools you need for the knitting pattern in an efficient order. When possible, try to complete all squares of a single color in the knitting grid to make that spool disappear, which helps to declutter the interface.