Let us say you have the following Work Item Types in your currently defined Process (say, OJC Agile):
And if you would like to add a "Blocked" state to your "User Story" work-item type, then you can do so by clicking the "User Story" work-item and then selecting "States" tab in the resultant page so that it looks like below:
Now click "New State" and define your custom state as shown in the screenshot below (in my case, I have defined a "Blocked" state) and click "Create" button:
After this you should see the newly defined state (in our case we created "Blocked" state) showing up in the States tab of the page for that work item.
While I personally prefer having a "Blocked" column in the Kanban board to get a quick visual cue of the number of Blocked items, I have Scrum Masters and team members wanting to change the state of the card when from inside when it is open for ease of use. This prompted me to bring about this change and am looking forward to see how it affects my team at work.