Analyse the following sentence -Tell me what is your problem.
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Bolded above are the subject and verb of your sentence; the cells are the noun which carry out the action "to deposit". So the short answer to your question is, it refers to "the cells".
A hair follicle is an object composed of cells, and the thing being deposited is protein. The manner in which the protein is being deposited is "layer by layer". So the sentence has a lot of additional information in it, and I can understand why it could be confusing. A shorter version with less information could have been written:
Hair production is the result of hair follicle cells depositing protein into this space.
However they wanted to give you more inform
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