I have a category which the settings are going to be replicated many times for many items per category, the item settings are just going to cascade down from the item settings within the category settings (read this part over many times I think this is clear) !!.

I have tried this so far,
mysite/components/com_k2/templates/--- copied the defaults folder and renamed it to blog

When I add new category the newly created blog template appears in the drop down category item layout menu as well as the default, success or so I thought, any changes made to this blog template are not showing when I create new items. It seems this method is not acceptable or have I missed something.

Have read countless methods including (below)

So we had to implement a different way to utilize sub-templates, within the templating capabilities of Joomla!. What we did is even simpler compared to current Joomla! templating: all you have to do to override K2's views is
COPY THE CONTENTS of the folder /components/com_k2/templates/ and
PASTE it into /templates/YOURJOOMLATEMPLATE/html/com_k2/.
Judging from the first folder path, it's clear that we do not use Joomla!'s logic, but it's for the better.

After you have copied this folder over to your /templates/YOURJOOMLATEMPLATE/html/com_k2/ folder, you will notice that some "views" are right at the root of that folder (e.g. generic.php or user.php) and some other views are located within a subfolder, called "default". These are located in: /templates/YOURJOOMLATE