Sanctified by the Commandments?

While studying the traditional tephillim in the Siddur Ashkenaz I noticed most prayers, especially those prayed when performing a mitzvah, say, taking challah or washing hands, usually begin as such:

"baruch attah Adonai, elokeinu melech haolam, asher kideshannu bemitzvotav {insert mitzvah}"

I can understand "Blessed art Thou, HaShem our God, Master of the universe, but how do I theologically understand the "Sanctification by Commandments" concept? Is that biblical? Now just because it sounds foreign and alien doesn't mean it's not biblical.

Okay, this one becomes real simple for me. In the Torah, God gives Noach the Noachide law for all families, but later on gives the Children of Israel laws, laws which define them as a covenant people and a separater. "Asher kideshanu bemitzvotav", "You who sanctify us by your commandments", refers to HaShem who set apart the Children of Israel from all the other peoples of the earth by giving them the Torah and its Mitzvot. "Sanctify" means to set apart. God chose them and set them apart to be a people wholly for him. He gave them laws and ways to live that separated them from all other peoples.

Okay, but how does this apply to me? Well, we believe in sanctification in the sense of perfection, as a work of God perfecting us. But we believe in the "light and darkness" concept of separation, holiness, and setting apart.

And hereby we do know that we know him, if we keep his commandments. He that saith, I know him, and keepeth not his commandments, is a liar, and the truth is not in him. But whoso keepeth his word, in him verily is the love of God perfected: hereby know we that we are in him. He that saith he abideth in him ought himself also so to walk, even as he walked.
(1Jn 2:3-6 KJV)

Ye are the light of the world. A city that is set on an hill cannot be hid. Neither do men light a candle, and put it under a bushel, but on a candlestick; and it giveth light unto all that are in the house. Let your light so shine before men, that they may see your good works, and glorify your Father which is in heaven. Think not that I am come to destroy the law, or the prophets: I am not come to destroy, but to fulfil. For verily I say unto you, Till heaven and earth pass, one jot or one tittle shall in no wise pass from the law, till all be fulfilled. Whosoever therefore shall break one of these least commandments, and shall teach men so, he shall be called the least in the kingdom of heaven: but whosoever shall do and teach them, the same shall be called great in the kingdom of heaven.
(Mat 5:14-19 KJV)