Blender is operation which is used to add pixel colors on source and destination bitmaps. First argument is type of operation, and the rest are multipliers used.
It works like that:
ResultColor = BLENDING_OPERATION( SourceColor * SourceMultiplier, DestinationColor * DestinationMultiplier )
In this case, you get:
RC = DestColor * 1 - SrcColor * 1
(0,0,0,0) = (0,0,0,128) * 1 - (255,255,255,255) * 1
(Blending clamps values, so that they wouldn't be less than 0)
Because you are drawing (255,255,255,255) (Source) over (0,0,0,128) (Destination), your result would be (0,0,0,0) - a complete transparency. So now you have a transparent circle, just as you want.
(In fact, you can use (0,0,0,255) instead of (255,255,255,255) as long as your Destination has only Alpha component to be erased)