For Destination Out blend mode to work, both the block and the player need to be on the same layer, and the block needs to be above the player. However, since you have other objects (tree), which can be above or below the player, the block will also erase parts of the trees which are below.
You probably need three layers - layer 1 for trees below, layer 2 for player+block, and layer 3 for trees above. Move trees between layers 1 and 3, don't change player's z-order.
There may be other solutions, depending on your game. For example, when the player starts digging, use DrawingCanvas - paste player sprite on it and erase the bottom part.