blocklist.xml contains a list of add-ons that Mozilla considers to be harmful to the user (contains security vulnerabilities, adversely affects browsing experience, etc.). Any installed add-on on the block list will be disabled and any attempt to install an add-on on the block list will result in an error. A list of the add-ons currently on the block list can be found on the Mozilla Add-ons Blocklist page.
blocklist.xml is by default automatically downloaded once a day from mozilla.com. The blocklist functionality can be disabled by extensions.blocklist.enabled, be modified to point to a different URL by extensions.blocklist.url, and changed in frequency by extensions.blocklist.interval.
blocklist.xml is by default automatically redownloaded once a day. As such, any changes made will be overwritten. If you wish to edit this file manually, it's recommended you turn off the update functionality by changing extensions.blocklist.url to be null.
The syntax of the file is described here.
This file can be moved to a different profile without any extra effort, but since it's automatically overwritten once a day, there's no point.
Deleting blocklist.xml will clear the block list until the file is redownloaded.