What exactly are Knots of Rust used for besides keeping you from rare items in chests? I mean why does the Clan shop sell them once you reach the ---> Possible Spoiler---> Knight of the Round rank?

I think the sole purpose of these KoRs is to power up the dmg level of a Dark Matter, which caps at 60K I believe. The Dark Matter's dmg is equivalent to the cumulative dmg dealt using the KoRs on enemies. But after you've used a piece of Dark Matter, the counter will reset back to 0.

Actually they, like axes and hammers, do random damage. It saved me once when I was fighting Elder Wyrm.

I just ignore them and say their just there to piss us off xD

There is an exact equation to the amount of damage Knot of Rust's and Dark Matter does...

(Taken from Split Infinity's Guide to FFXIII on www.gamefaqs.com)

a) Formula for Knot of Rust damage is (capped at 9999):
<DMG = MAX HP / RND(1~10)>
You can increase damage done by Knot of Rust, if you cast Bubble on chr.

b) Formula for Dark Matter damage is (capped at 60000):
<DMG = SUM (Knot of Rust DMG) / 3 + SUM (Devour Soul DMG) / 3>