Skyscraper
Adventurer
Historically, blue dragons are evil and being "friends" with someone usually means forcing him to do stuff or him forcing you to do stuff, depending on the pecking order. However, my understanding of your post is that the PCs befriended him, which suggests that this is not an evil dragon. So... what's his persnality like, apart from being clostrophobic and sex-confused? Is he prone to eating any creature he meets? Is double-crossing his middle-name? Or does he like chillin' with the boys over a bear and telling jokes about red dragons having small tails and such?
Assuming he's the kind of creature that can have friends, then i'd allow him to stick with the party.
I find that two suggestions from above stand out: the first one is to stat him out as a PC. I.e. inspire yourself from the MM blue dragon entry, but ditch it in favor of something similar to the PCs' power level (or slightly inferior to their level). You'll then essentially be adding a NPC to the party. Just don't have him steal the show if you do. And have him act intelligently since dragons are intelligent creatures: no need for him to destroy things or breath on the PCs by accident. This is one of the game's most sublime creature, have it act as such.
The second suggestion is called for if they decide to ride the dragon in combat. In such a case, you can still keep the same stats that you prepared, but you need to consult the mounted combat section in the DMG to see how it works.
In any event, if the PCs like the dragon and vice versa, it is possible for him at some point to even give his life to save theirs. If he comes down heroicly, they'll remember him for sure.
Remember that including the dragon in the party is a minor mechanics challenge for you; however, it is probably a great and wonderful moment for the players. In an old campaign i ran 15-20 years ago, the players managed to subdue a chimera and keep it in their dungeon, feeding it and taking it out to hunt and stuff. They still talk about that now. Don't ruin this great accomplishment for the players.
Have fun,
Sky
Assuming he's the kind of creature that can have friends, then i'd allow him to stick with the party.
I find that two suggestions from above stand out: the first one is to stat him out as a PC. I.e. inspire yourself from the MM blue dragon entry, but ditch it in favor of something similar to the PCs' power level (or slightly inferior to their level). You'll then essentially be adding a NPC to the party. Just don't have him steal the show if you do. And have him act intelligently since dragons are intelligent creatures: no need for him to destroy things or breath on the PCs by accident. This is one of the game's most sublime creature, have it act as such.
The second suggestion is called for if they decide to ride the dragon in combat. In such a case, you can still keep the same stats that you prepared, but you need to consult the mounted combat section in the DMG to see how it works.
In any event, if the PCs like the dragon and vice versa, it is possible for him at some point to even give his life to save theirs. If he comes down heroicly, they'll remember him for sure.
Remember that including the dragon in the party is a minor mechanics challenge for you; however, it is probably a great and wonderful moment for the players. In an old campaign i ran 15-20 years ago, the players managed to subdue a chimera and keep it in their dungeon, feeding it and taking it out to hunt and stuff. They still talk about that now. Don't ruin this great accomplishment for the players.
Have fun,
Sky