I really thought that last comic would end this debate, but it seems like there's still a lot of confusion. So here goes:

Step 1: Kill everyone with the original target's blood. This is a simple yes/no effect: Is a creature (the secondary target) related by blood to the original target at all, in any way? If yes, kill it. If no, move on. Number of generations or percentage of blood or direction doesn't matter.

Step 2: Kill everyone who shares blood with any of the people killed in Step 1. Think of it as killing everyone descended from (or siblings to) any and all still-living ancestors of each secondary target. So if Penelope had a grandfather on one side and a great-grandmother on the other side who were still alive, every person who could trace their blood back to either of those people would be dead, because Penelope's daughter carries both of their bloods. If a person can only trace their blood through (say) Penelope's already-dead great-great-great-grandfather, then they're safe. Thus cousins and second-cousins and the like are all dead, but more distant genetic relations are not. It is possible for some cousins to survive if all older generations were already dead, yes, but Vaarsuvius wasn't really likely to take the time to make that distinction while sobbing on a dungeon hallway floor.

Now for some anticipated FAQs:

That's not exactly what Vaarsvuius said when the spell was cast, though.
First, Vaarsvuius is prone to poetic word choice and had no particular reason to include various exceptions or inclusions while in the middle of punishing the dragon. Second, as the author, I also had an interest in not necessarily giving away the twist that the Draketooths would be killed two years ahead of time (leading me to choose words that maybe implied one thing while allowing for another). In other words, don't try to parse the language too precisely.

Wouldn't that spell kill everyone of the original target's species?
In our world? Maybe. The OOTS world is not ours, though. It was created fully populated, even with black dragons. So there could be 100 original black dragons who (as V noted) breed slowly over the relatively-short span of time the current world has been in existence, leading to one-quarter of them being wiped out. If it had been cast on a human first, it may well have taken half or more of the population with it, depending on how many Original Humans there had been and how much interbreeding had occurred. Good thing that's not what happened, right?

But if it worked like that, it would have [insert obscure effect proven with math]!
Yeah, well, it didn't. Why? I don't know. But it didn't. I guess that makes me a crappy writer because I didn't think of whatever implication you just thought of, but there it is. I'm not a biologist or a mathematician. If it makes you feel better, just assume that all the laws of heredity and genetics work differently because It's Magic™.

I hope this will end the endless debates. It's really quite simple, and if you're getting to a point where it seems utterly complicated or recursive or whatever, you're probably thinking about it more than I did.