Putting sawdust in the walls of an old house was common practice back in the old days, but it was hardly ideal. I helped keep the house warmer...for awhile. Fire was actually the least of the problems with this type of insulation. The greater problems were with settling. Over a very short period of time, the sawdust would compress, and leave gaps at the top of the walls. Since heat rises, this just let the heat out.
Another problem was with the lathe that they used back in those days. Any tiny hole would cause the sawdust to come billowing out...from say a
mouse or rat.
Rats and mice burrowed through the walls and loved the sawdust to make rats nests in as well.
…
Today...cellulose is used, which is just paper which of
course comes from wood. The difference is, today they have machines that blow it in to a certain pressure so there is no settling. The cellulose also has borax in it which makes it fire resistant, as well as mice and rat resistant. And of course construction methods have got to the point where we have much more air tight walls that keep the cellulose in them.
A person could certainly make their own sawdust insulation, but for rat and fire resistance, they probably
should add borax.