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PostgreSQL offers encryption at several levels, and provides flexibility in protecting data from disclosure due to database server theft, unscrupulous administrators, and insecure networks. Encryption might also be required to secure sensitive data such as medical records or financial transactions.
By default, database user passwords are stored as MD5 hashes, so the administrator cannot determine the actual password assigned to the user. If MD5 encryption is used for client authentication, the unencrypted password is never even temporarily present on the server because the client MD5-encrypts it before being sent across the network.
The pgcrypto module allows certain fields to be stored encrypted. This is useful if only some of the data is sensitive. The client supplies the decryption key and the data is decrypted on the server and then sent to the client.
The decrypted data and the decryption key are present on the server for a brief time while it is being decrypted and communicated between the client and server. This presents a brief moment where the data and keys can be intercepted by someone with complete access to the database server, such as the system administrator.
On Linux, encryption can be layered on top of a file system using a "loopback device". This allows an entire file system partition to be encrypted on disk, and decrypted by the operating system. On FreeBSD, the equivalent facility is called GEOM Based Disk Encryption (gbde), and many other operating systems support this functionality, including Windows.
This mechanism prevents unencrypted data from being read from the drives if the drives or the entire computer is stolen. This does not protect against attacks while the file system is mounted, because when mounted, the operating system provides an unencrypted view of the data. However, to mount the file system, you need some way for the encryption key to be passed to the operating system, and sometimes the key is stored somewhere on the host that mounts the disk.
The MD5 authentication method double-encrypts the password on the client before sending it to the server. It first MD5-encrypts it based on the user name, and then encrypts it based on a random salt sent by the server when the database connection was made. It is this double-encrypted value that is sent over the network to the server. Double-encryption not only prevents the password from being discovered, it also prevents another connection from using the same encrypted password to connect to the database server at a later time.
SSL connections encrypt all data sent across the network: the password, the queries, and the data returned. The pg_hba.conf file allows administrators to specify which hosts can use non-encrypted connections (host) and which require SSL-encrypted connections (hostssl). Also, clients can specify that they connect to servers only via SSL. Stunnel or SSH can also be used to encrypt transmissions.
It is possible for both the client and server to provide SSL certificates to each other. It takes some extra configuration on each side, but this provides stronger verification of identity than the mere use of passwords. It prevents a computer from pretending to be the server just long enough to read the password sent by the client. It also helps prevent "man in the middle" attacks where a computer between the client and server pretends to be the server and reads and passes all data between the client and server.
If the system administrator for the server's machine cannot be trusted, it is necessary for the client to encrypt the data; this way, unencrypted data never appears on the database server. Data is encrypted on the client before being sent to the server, and database results have to be decrypted on the client before being used.