I'm also still confused about 'blend with shader' - I read in one place that it acts as a mask.
coming from MojoWorld, where there *is* a blend node, I find the terminology confusing as well. the MojoWorld blend node takes 5 inputs - and I'll digress for another moment - nodes in Terragen seem to differentiate between inputs and parameters... in MojoWorld, a node will have as many 'spigots' on the top as parameters in the parameter editor screen. if a parameter can't accept another node as input, it's only an outline. but in Terragen, I haven't yet made any sense between what's a parameter that can be driven by another node and what's just a value that can be set - and there's often a 'spigot' on top of a node named 'input' which has no corresponding field in the parameter editor.
anyway, the way a blend node works in MojoWorld is you've got an input for the "blend value" - this can be any function, or constant value. it defaults to 0.5, which makes a 50/50 blend, assuming none of the other parameters have been changed.... then there are two inputs to define the test range -- the "blend range low" and "blend range high". these default to 0 and 1, respectively (which is why the 0.5 creates a 50/50 blend by default). the last two parameters are "the value to output if the blend test is off the low end of the range" and "the value to output if the blend is off the high end of the range" - and in the case where the blend value is between the range specified, it'll actually blend the values (weighted average).
but here in Terragen, there's this "blend by shader" or "blend by heightfield" and while I saw that this is supposed to "act like a mask" I'm totally unclear as to what I get in the places that are "exposed" by the mask, and what I get in places that are "covered" by the mask, and indeed, what "values" from this "blend by shader" mean "expose" and which mean "cover"....
back to the particular topic at hand - I did sucessfully add a heightfield from image to a world using the steps I listed above, and it worked just fine. in a separate test, I tried to "use a blend by heightfield," as suggested above, I did not get that to work.