This rainbow block is a custom ability. You can put code in it, and use it in any part of your project. This saves you from having to add the same code manually whenever you want to reuse it.
Any changes you make to the blocks inside a custom block will apply everywhere else this block is used.
Any custom abilities that are created will appear as a block in the 'Custom' menu. These can be used inside another ability or with other objects in your project.