the Hilbert space is $\mathcal{H} := \mathbb{C}^2$
the elementary observables are the Pauli matrices $\hat{\sigma}_1, \hat{\sigma}_2, \hat{\sigma_3}$$\hat{\sigma}_1, \hat{\sigma}_2, \hat{\sigma}_3$, which satisfy $$\hat{\sigma}_i \hat{\sigma}_j = \delta_{ij} \mathbf{1} + i \varepsilon_{ijk} \hat{\sigma}_k$$
From there we can build the abstract *-algebra $\mathcal{A}$ generated by 3 elements $\sigma_1,\sigma_2,\sigma_3$ satisfying $\hat{\sigma}_i \hat{\sigma}_j = \delta_{ij} 1 + i \varepsilon_{ijk} \sigma_k$, aka the$\sigma_i \sigma_j = \delta_{ij} 1 + i \varepsilon_{ijk} \sigma_k$ and universal enveloping algebra$\sigma _i^* = \sigma _i$. Turns out it is the 4-dimensional algbra $M_2(\mathbb{C})$ mentioned by @Phoenix87, a basis of which is $$1,\sigma_1,\sigma_2,\sigma_3$$
For any $a = \lambda 1 + \mu_i \sigma_i \in \mathcal{A}$, we define $$\hat{a} := \lambda \mathbf{1} + \mu_i \hat{\sigma}_i$$ Note that $\forall a,b \in \mathcal{A}, \widehat{ab} = \hat{a} \hat{b}$ by construction, and that $\left\{ \hat{a} \middle| a \in \mathcal{A} \right\}$ spans the full space of operators on $\mathcal{H}$ (namely, the space of $2\times 2$ complex matrices, which constituteconstitutes the defining representation of the abstract algebra $M_2(\mathbb{C})$).
Now, given a density matrix $\hat{\rho}$ on $\mathcal{H}$, we define a linear form $\rho: \mathcal{A} \rightarrow \mathbb{C}$ by $$\forall a \in \mathcal{A}, \rho(a) := \text{Tr} \hat{\rho} \hat{a}$$ We can check that $\rho$ is an algebraic state on $\mathcal{A}$ ie:
Thus, the space of density matrices over $\mathcal{H}$ can be identified one-to-one with the space of algebraic states over $\mathcal{A}$, so we can do physics without ever referring to $\mathcal{H}$: knowing $\mathcal{A}$, we can parametrize the space of states of myour quantum theory by algebraic states, and, given one such algebraic state, we can compute the corresponding expectation values for measurements.
At this point, we need to distinguish cases. In the case werewhere $\vec{\omega}$ is actually on the unit sphere (ie $\|\vec{\omega}\| = 1$), we find $$\mathcal{K}_{\omega} = \text{Span} \left\{ 1 - \omega_i \sigma_i, (u_j + i v_j) \sigma_j \right\}$$ where $\vec{u}, \vec{v}$ are some unit vectors such that $\vec{\omega}, \vec{u}, \vec{v}$ form an orthonormal basis. So, in this case, $\mathcal{K}_{\omega}$ is 2-dimensional, and therefore $\mathcal{H}_{\omega} := \mathcal{A} / \mathcal{K}_{\omega}$ is $4-2=2$-dimensional. $\mathcal{H}_{\omega}$ is spanned eg. by $\left [1\right ]$ and $\left [u_j \sigma_j\right ]$ (where $\left [\,\cdot\,\right ]$ denotes equivalence classes modulo $\mathcal{K}_{\omega}$).
Finally, we want to confirm that the thus obtained Hilbert space/representation reproducereproduces the $\mathcal{H}$ we started from aboveat the very beginning. Indeed, denoting by $\left|\phi_{\omega}\right\rangle$ the eigenvector of $\omega_i \hat{\sigma}_i$ with eigenvalue $+1$ (ie spin $+1$ in the direction of $\vec{\omega}$), $\mathcal{H}_{\omega}$ can be identified with $\mathcal{H}$, via the map $$\begin{array}{ccc}\mathcal{H}_{\omega} & \mapsto & \mathcal{H}\\ \left[a\right] & \rightarrow & \hat{a} \left|\phi_{\omega}\right\rangle \end{array}$$$$\begin{array}{ccc}\mathcal{H}_{\omega} & \rightarrow & \mathcal{H}\\ \left[a\right] & \mapsto & \hat{a} \left|\phi_{\omega}\right\rangle \end{array}$$ which is well-defined, bijective and matches the scalar products and representations on both sides.
What about mixed states?
But what would have happened if we had chosen a state characterized by a $\vec{\omega}$ in the [to be continued]interior of the unit ball (ie $\|\vec{\omega}\| < 1$)? In this case, $\mathcal{K}_{\omega}$ would be just $\{0\}$ so $\mathcal{H}_{\omega}$ would be 4-dimensional. One can check that the representation created by the GNS construction can then be identified with $\mathcal{H} \oplus \mathcal{H}$ via: $$\begin{array}{ccc} \mathcal{H}_{\omega } \approx \mathcal{A} & \rightarrow & \mathcal{H}^{(1)} \oplus \mathcal{H}^{(2)}\\ \left[a\right] = a & \mapsto & \hat{a} \left( \cos \eta \left|\phi ^+_{\omega }\right\rangle ^{(1)} + \sin \eta \left|\phi ^-_{\omega }\right\rangle ^{(2)} \right) \end{array}$$ where $\eta \in \left[0,\frac{\pi }{2}\right[$ is defined by $\cos^2 \eta := \frac{1 + \|\omega \|}{2}$ and $\left|\phi ^{\pm }_{\omega }\right\rangle$ denote the eigenvectors of $\frac{\omega _i}{\|\omega \|} \hat{\sigma }_i$ with eigenvalue $\pm 1$ respectively.
It is a general property of the GNS construction that the representation arising from a mixed state will typically be a direct sum of independent representations (aka. superselection sectors), while pure states lead to irreducible representations (ie. representations that cannot be split as a direct sum of simpler representations).
Since density matrices are now $4\times 4$ matrices, does it means that we suddenly have more quantum states that we had on just $\mathcal{H}$? Well, actually no. Density matrices on $\mathcal{H}^{(1)} \oplus \mathcal{H}^{(2)}$ can be written as block matrices: $$\hat{\rho }^{\omega } = \left( \begin{array}{cc} \hat{\rho }^{(1)} & \hat{\gamma } \\ \hat{\gamma }^{\dagger} & \hat{\rho }^{(2)} \end{array} \right)$$ with $\hat{\rho }^{(1)}, \hat{\rho }^{(2)}$ positive semi-definite and $\text{Tr} \hat{\rho }^{(1)} + \text{Tr} \hat{\rho }^{(2)} = 1$ (as well as suitable bounds on $\hat{\gamma }$ for $\hat{\rho }^{\omega }$ to be positive semi-definite). But since observables have the form: $$\hat{a}^{\omega } = \left( \begin{array}{cc} \hat{a} & 0 \\ 0 & \hat{a} \end{array} \right)$$ expectation values (which are the only physically measurable quantities) are simply given by $$\text{Tr} \hat{\rho }^{\omega } \hat{a}^{\omega } = \text{Tr} \left[ \left(\hat{\rho }^{(1)} + \hat{\rho }^{(2)}\right) \hat{a} \right]$$ So we don't have any new quantum state, we just have many different density matrices corresponding to the same quantum state, namely the state that on $\mathcal{H}$ was represented by the density matrix $\hat{\rho } = \hat{\rho }^{(1)} + \hat{\rho }^{(2)}$. In this sense, $\mathcal{H}_{\omega }$ describes just the same quantum theory as $\mathcal{H}$, but with some extra redondancy in the representation of quantum states.
A word of caution: foliums
To be honest, this toy model works a bit too well:
all algebraic states can be represented as density matrices on $\mathcal{H}$
all algebraic states give rise, via the GNS construction, to one or more copies of $\mathcal{H}$
Propositions 1. and 2. are in fact equivalent: they express the fact that there is only one "folium" of states on $M_2(\mathbb{C})$. The folium of an algebraic state $\omega$ is defined as the space of algebraic states that can be represented as density matrices of the GNS representation $\mathcal{H}_{\omega }$ arising from $\omega$. If $\omega$ is pure, all states in its folium will have one or more copies of $\mathcal{H}_{\omega }$ as their GNS representation. But in general an algebra of observables can admit many disjoint foliums, or, equivalently, many inequivalent representations.
For example, if we were to redo the analysis for the *-algebra generated again by 3 self-adjoint elements $\sigma_1,\sigma_2,\sigma_3$ but now only assuming the weaker relations $\left[\sigma_i, \sigma_j\right] = 2i \varepsilon_{ijk} \sigma_k$, aka the universal enveloping algebra of the Lie algebra $\mathfrak{so}(3) = \mathfrak{su}(2)$, we would find infinitely many inequivalent representations, corresponding to all possible spins $j$.
In the case of ordinary quantum mechanics with an algebra of observables generated by exponentiated position and momentum operators (to avoid issues with unbounded operators), the Stone–von Neumann theorem implies that there is only one folium of "sufficiently regular" states, although if we drop the regularity condition more exotic states and associated GNS representations can be constructed. In QFT, on the other hand, there is a plethora of distinct foliums. Moreover, on curved spacetimes, there may be no way to single out a preferred vacuum state/folium and associated representation: that's where the algebraic formalism truly shines, because it allows to discuss all foliums at once, without having to specialize to an arbitrarily chosen one as we would have to do to get an Hilbert space formulation.