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Boil 2 cups water.
Break the dried chilies apart and shake out the seeds. You should have roughly 1 cup (6-7 ounces). In a medium bowl, pour boiling water over the chilies and cover for 20-30 minutes or until fully softened, stirring halfway through.
Strain the chilies and place them in a mini blender with garlic, shallots, salt, and sugar. Add 4-6 tablespoons water ( or enough to get the blender going) and blend until smooth.
Pour the chili paste into a small saucepan, cover, bring to a simmer, lower heat and simmer gently for 15-20 minutes, stirring occasionally.
Stir in the vinegar. Taste, adjust salt, sugar, and vinegar to taste.
Store in a sealed jar in the refrigerator for 2-3 months.