Blending is done through specific VMT shaders (used in place of the usual VertexLitGeneric for models or LightmappedGeneric for brushes).
1.
http://developer.valvesoftware.com/wiki/WorldTwoTextureBlend
This one is mostly useless, it draws a texture on top of another (kind of a fixed overlay). Maybe the marked tiles (brown with the RED bomb symbol, blue with the BLU square symbol) are done this way, I'm not sure.
2.
http://developer.valvesoftware.com/wiki/WorldVertexTransition
Also known as WVT material, it's made for alpha painting on displacements. I suppose this is what you are looking for.
3.
http://developer.valvesoftware.com/wiki/Blendmodulate
Two much more elaborate mechanisms (used on top of, respectively, a LightmappedGeneric and a WorldVertexTransition), it looks like you can do some awesome stuff with this but it's a vastly greater level of complexity.