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Paint on the outside of an engine is for rust prevention and looks. The engines I've built, I've also painted the inside of the block. Why you might ask? Two reasons. 1) paint on the inside surface of the block allows the oil to drain back faster. Not so important on a street engine, but critical when you're pulling 8 grand up a hill climb...you don't want your sump to run out of oil. 2) the paint also helps seal the misc grains of sand that might be still present from the casting process. Of course you keep the paint out of the bearing and cylinder area as well as any of the oil passages. I used General Electric Glyptol, which is a paint designed for the inside of power generators. Thinned down abit and it really sticks well to a properly preped block.
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