Soak the dried shrimp in warm water for about 15 minutes. In a separate bowl, soak the dried chili in warm water until soft and then remove. You can use a mortar and pestle to pound the dried shrimp into fine pieces or use a food processor to do so (which I did)
Snap the dried chili in half to open and discard the seeds. Soak the dried chili in warm water until soft and then drain off the water
Put the shallots, garlic, dried chili, belacan, and water in a blender and blend until smooth
Preheat a wok or a large skillet. Add cooking oil and then saute the chili mixture and lemongrass stalk for about 5 minutes until fragrant. Keep the heat on medium and keep stirring. Add the dried shrimp, sugar, and salt to taste and keep stirring
The mixture is wet and clumpy at first, but keep sauteing until it gets really dry and lighter. Have a taste and adjust seasoning as needed
Remove from the heat and let it cools down completely before storing