I do agree that you were quite helpless when you got hit but if you make some overly easy blocking system you'd n00bify everything again. So here's what I thought about using other's people suggestions (such as david and zeonix).
Knockbacks are a little shorter than 1.1 and maybe a little slower, I'm not sure - testing would point that out. Anyway, if you hold block and aim at the enemy when you are hit (except when you're roling on the ground), you will lose some ki but you will receive no damage. The blocking player however will still be knocked back and will accelerate by about 10% or so (maybe more, again testing would be the solution). This means that if the attacking player is good enough (thus rewarding practice) he can continiously hit the blocking player until he hits a wall, if he runs out of ki first, he will not block the attack. By blocking, you will only receive the damage you get when you hit the wall so it does not include the damage the attacking player has done on you.
It should be pretty hard to do those continous attacks (because of the acceleration involved) so you should be somewhat rewarded when you manage to perform such a move (the extending of the knockback risking in wall-damage).
I think this pretty much balances it out for everyone. Attacking is going to be alot harder so combos are less likely to happen, but you can always try to block the attack. Players would have to come up with distractions or other moves to evade the block thus rewarding practice time (practice gives you experience which is very important). Other players can defend themselves (also in a 2v1 or more) by carefully aiming and blocking accordingly so even if multiple enemies try to attack them they CAN block all the hits if they are good enough. Of course this will leave the victim with a possible shortage on ki but teamwork must also be promoted imo.
Of course this is only for combos in mid air. What if you get hit downward to the ground or to the sky?
If you get hit downwards you must press and hold jump, if you don't you will roll like you do now unless of course when you are out of ki. If you do press jump, you will land with both feet on the ground (crouching position as if you got a piano on your back with maybe one hand on the ground) but you will slide a bit depending on the angle you got hit from. Don't understand? take a look at this:
Situation 1: The player gets hit directly from above, when he reaches the ground he will be stunned for a period of time before he can jump/teleport whatever, of course the player will receive damage but a little less than when he didn't press jump (about 5 hp difference probably)
Situation 2: The player get's hit from a certain angle, depending on that angle, the player will slide over the ground. Again, damage is taken but this time it's less than situation 1 and less than when jump wasn't pressed.
If the player slides against a wall, he will lose his ability to recover earlier and will smack against the wall and receive additional damage.
The damage taken also depends on the angle, the more from above, the more damage.
Ok, now for some extra details:
When the player is sliding a struggle bar will appear, once the player get's in the blue area he will have the CHOICE to press jump again and perform a cool backflip. If he doesn't press jump, he will continue to slide until he has come to a complete stop (which shouldn't be too far away cos he can already jump) this would probably be a 'cool' factor. Let's say some opponent hits you, you calmly recover as if you got hit by the biggest n00b ever alive and then you might want to slowly walk up to him or something to intimidate your foe.
Like I said, the damage taken depends on the angle, to compromise this a bit recovery time while sliding will also be shorter but can only be done from a minimum angle because you cannot slide if you got from above. When this minimum angle is not reached it will affect the recovery time.
If the player performs the mentioned backflip he can also walljump if he connects to a wall meaning he could slide, backflip, walljump, teleport, swoop and start a counter-attack... dbz style.
Keep in mind this SIMPLE MELEE ONLY, if you guys like this I might think of something for advanced melee blocking.
:edit: you ARE vulnerable while sliding or recovering (when hit from above)