Blending is the primary way of sneaking in the Assassin's Creed games.
How to Blend
To blend in with the crowd, simply approach a group of two or more NPCs and move between them. It will appear as if you are a part of the group to oncoming guards, and you will essentially be rendered invisible to their gaze.
When you are successfully blended, a white aura will appear around your character to let you know that you are not visible to NPCs.
Blending can be done in both single player, where it will help you fend off curious guards, and in multiplayer, where it will make you appear more inconspicuous to your hunter.