I've got a ton of Knots of Rust in my inventory, but they don't do much damage to enemies when I use them. What are they good for?
The damage of a Knot of Rust is based on your current HP. So it is best to use them with a character who has a high amount of HP. Early game, they are thus pretty weak, and late game they aren't entirely potent. The damage is equal to your current HP divided by a random number up to 10.
I find them useful as a gambit for a Bubbled character who isn't particularly gifted in the ranged damage department, or who otherwise can't use spells or skills to affect a particular enemy type due to resistances. No creature really resists the damage, and it beats sitting there either not attacking or worse healing the target. Also, the main reason to just continually use them is detailed below, as while the individual damage of a single Knot of Rust is puny, the results of continually using them can be reaped to a major benefit.
The main utility of Knots of Rust is to amplify the damage of another item, called Dark Matter. This item is much rarer, and deals damage equal to one third of the cumulative damage done by Knots of Rust, to a maximum of 60000 damage. Using a Dark Matter will reset this, but it's clear to see that it is a very potent damage source.
There is a late game Esper, Shemhazai, whose moveset is based on the exact same mechanic. Its regular attack deals damage in the same fashion as a Knot of Rust, while its ultimate attack (used when it has <30% HP remaining or when there's only 10 seconds left on the clock) mimics Dark Matter. Note that because of the timer part, it is almost always going to perform that ability. As such, while it can increase the damage for you to use Dark Matter, it is also almost guaranteed to expend all of your stored damage - reserve summoning for when you do intend to blow that damage.