What does the setting Block all traffic to remote virtual network on your virtual network peering do?

Selecting the Block all traffic to remote virtual network setting only changes the definition of the VirtualNetwork service tag. It doesn't fully prevent traffic flow across the peer connection.

Select Block all traffic to the remote virtual network if you don't want traffic to flow to the peered virtual network by default. You can select this setting if you have peering between two virtual networks but occasionally want to disable default traffic flow between the two. You may find enabling/disabling is more convenient than deleting and re-creating peerings. When this setting is selected, traffic doesn't flow between the peered virtual networks by default; however, traffic may still flow if explicitly allowed through a network security group rule that includes the appropriate IP addresses or application security groups.