Resolve - Blur the edges of an inserted clip
I found the answer:


Go to Color at the bottom.
Select the clip you want to modify (the small video on top).
Add your usual nodes as needed.
Right click and Add Alpha Output. This will create a new blue terminator.
Right click and add a new Corrector node and use the rectangle, ellipse, or whatever shape you need to define the transparent/opaque regions.
Connect the previous nodes to the recently created node. Now link the green and blue points. This will make an alpha channel, making the region you marked as transparent/opaque.
If you need to use the same ALPHA node in other clips, you can create a Shared node that can be reused in other clips. Instead of adding a Corrector node this time, use your shared node.


See the image below for a clarification:



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