server#1 hosts domain.com content.
If I want to map a different IP on another server to domain.com/blog would I use a CNAME record for this?
Or is a cname only for blog.domain.com ?
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A CNAME (and anything related to domain names) only covers the part up to the first slash.
In order to host domain.com/blog on a different IP, you'll need to do some sort of proxying on the web server that handles domain.com. It'll be quite a bit easier to use blog.domain.com instead, if that's feasible.