Prep the Peppers: Put on your gloves! This is a non-negotiable step unless you want a souvenir burn. Remove the stems from all peppers and discard them. Roughly chop the peppers into 1-inch pieces. Don't worry about the seeds unless you want a milder sauce. The seeds are where the real flavor—and heat—lives.
Boil Down: Toss the chopped peppers, bell pepper, onion, shallot, and garlic into a large pot or kettle. Pour in the vinegar until all ingredients are just covered. Bring the mixture to a boil over high heat, then reduce to a simmer. Cook until the liquid has reduced by about two-thirds, and the mixture looks like a thick, watery paste. You'll want to run your exhaust fan and open the windows—this stuff packs a punch.
Process and Finish: Remove the pot from the heat and let the mixture cool. Once cooled, transfer it to a blender or food processor. Pulse a few times to break down any large chunks, but don't overdo it—you want some texture. Pour the sauce into a bowl, then stir in the diced tomatoes or tomato sauce if you're using them. Mix well until everything is combined.