Kinstone Fusion is a skill seen in The Minish Cap. Link can collect pieces of Kinstones as he travels, and he can fuse them with another half of a Kinstone to make something appear in the game world. The other half of the Kinstone is carried by certain characters or objects within the game.
The Minish Cap
Link learns to fuse kinstones from the Hurdy-Gurdy Man in Hyrule Town, who also gives him a Kinstone Bag to store each kinstone in. When Link walks up to a character, such as a certain Hylian, Minish, or animal, a thought bubble may appear over their head. If this occurs, Link can fuse Kinstones with them by pressing 'L'. Link can also fuse Kinstones with other certain objects, such as some statues and clouds.
Fusing Kinstones will cause something good to happen in the overworld. These can include new caves opening up, staircases appearing, or new characters to appear, allowing Link to interact with them. In some occasions, a golden enemy will appear in a certain area in the overworld. Upon killing these enemies, they will drop 50 to 100 Rupees (in a small few cases it's 200, but it's a lot later on in the game) for Link to pick up.
Kinstone Fusion seems to be a common myth among the people of Hyrule. Upon fusing Kinstones with them, they will usually say something like "I wonder if something good will happen!"
Kinstone Fusion is necessary in some parts of the game in order to complete it. Golden Kinstones are the ones that are necessary in order to complete the game, while green, red, and blue ones are optional. When Link is in Castor Wilds, he must fuse Golden Kinstones with three large statues. When Link is in the Cloud Tops, he must fuse Golden Kinstones with five Mysterious Clouds.
Kinstone Fusion itself is a form of a simple puzzle. The character or object that Link is trading with has a certain half of a Kinstone. Link will have to try to find the opposite half of the Kinstone that fits the shape of and is the same color as the first half. Once this is done, a short cutscene will play, revealing the effect that the fusion caused.