Blocking (or guarding) is when an attack is defended. This is a basic feature that's found in every fighting game. Most attacks can be guarded both standing and crouching, but some can only be blocked in one of these states. Certain low attacks like sweeps can only be guarded low, while all jumping attacks must be blocked high.

Air blocking is exactly what it sounds like, you can block an attack in the air. Rules for air guarding are dependent on the game: some allow for any (non-low) attack to be guarded in the air, others don't allow for air guarding at all, some only allow this against other airborne attacks.

Mugen's common1.cns takes care of blocking with no issues, save for a quirk where the animation doesn't change from standing to crouching (and vice versa) during pushback. This doesn't effect the ability to switch between standing and crouching guard however.