Password Encryption Explained: Encryption vs Hashing

What is password encryption?

Password encryption is the process of turning a readable password into unreadable ciphertext using a secret key, so that only someone with the key can turn it back.

The important word is back. Encryption is reversible by design. That makes it the right tool when you need the original password again, such as a password manager filling a login form, and the wrong tool when you only need to check a password, such as a website verifying your sign-in.

Three ideas cover almost every conversation about password security: encryption (reversible with a key), hashing (one-way), and key derivation (turning a human password into a strong key). The rest of this guide takes them one at a time.

Is a password encrypted or hashed? What is the difference?

A website should hash your password, while a password manager must encrypt it, because the website only needs to check it and the manager needs to give it back to you.

A hash is a one-way fingerprint. When you sign up, the site runs your password through a slow hashing function with a random salt and stores the result. When you sign in, it hashes what you typed and compares the two. If the database leaks, attackers get fingerprints, not passwords, and must guess each one.

	Encryption	Hashing
Reversible?	Yes, with the key	No, one-way
Needs a secret key?	Yes	No (uses a salt instead)
Typical use	Password managers, encrypted files, backups	Websites storing user sign-in passwords
Main risk	The key is stolen or weak	Weak passwords are guessed offline
Common algorithms	AES-256-GCM, ChaCha20-Poly1305	Argon2id, scrypt, bcrypt, PBKDF2

The OWASP Password Storage Cheat Sheet is the standard reference for websites. It recommends slow, salted hashing such as Argon2id and warns against storing passwords with reversible encryption. If a site can email you your old password in plain text, it is not following that advice.

How does AES-256 encrypt passwords?

AES-256 encrypts passwords by mixing the data with a 256-bit secret key through many rounds of substitution and shuffling, producing ciphertext that is useless without that exact key.

AES (the Advanced Encryption Standard) is a symmetric cipher: the same key locks and unlocks. The "256" is the key length in bits. Guessing a random 256-bit key by brute force is not a realistic attack, so real-world attacks target something else: a weak password that produced the key, malware on the device, or a stolen unlocked session.

The mode matters too. AES-256-GCM is the common choice in modern apps because it does two jobs at once:

Confidentiality: nobody without the key can read the item.
Integrity: if anyone changes even one bit of the ciphertext, decryption fails instead of returning tampered data.

Each encryption also uses a fresh random value (a nonce), so encrypting the same password twice produces two different ciphertexts. That stops an observer from spotting that two items share a password.

How is an encryption password turned into a key?

An encryption password is turned into a key by a key derivation function, which deliberately repeats a hashing step many times with a salt so that each guess costs an attacker real time.

Human passwords are short and predictable compared to a random 256-bit key. A key derivation function (KDF) closes part of that gap. The most widely used ones are:

PBKDF2: repeats HMAC-SHA256 a set number of times. OWASP currently recommends 600,000 iterations for PBKDF2-HMAC-SHA256.
Argon2id and scrypt: also use lots of memory, which makes large-scale guessing on graphics cards more expensive.

The salt is a random value stored alongside the result. It means two people with the same master password still end up with different keys, and attackers cannot reuse a precomputed table.

Many apps then use HKDF to split the stretched result into separate keys for separate jobs, for example one key that encrypts your data and a different value that proves who you are when you sign in. Keeping those apart means the server can check your sign-in without ever learning your encryption key.

How do you encrypt passwords safely, step by step?

To encrypt passwords safely, use a well-reviewed tool that derives a key from a strong master password and encrypts each entry with an authenticated cipher; never build your own scheme.

Whether you pick a password manager, an encrypted file or an encrypted note, the same checklist applies:

Choose a long master password. A passphrase of several random words is easier to remember and harder to guess than a short complex string. NIST SP 800-63B favours length over composition rules.
Check the cipher. Look for AES-256-GCM or ChaCha20-Poly1305 in the vendor's security documentation.
Check the key derivation. Look for PBKDF2 with a high iteration count, Argon2id or scrypt.
Confirm where encryption happens. It should happen on your device, before anything is uploaded.
Turn on a second factor for the account, so a guessed master password is not enough on its own.
Store your recovery details offline, such as a printed emergency kit, because a strong scheme cannot be bypassed if you forget the password.
Lock the vault on shared computers, since encryption does not protect an unlocked session.

What to avoid: password-protected spreadsheets shared by email, notes apps without end-to-end encryption, and chat threads. For a team, a shared spreadsheet means everyone holds the same file and the same password forever.

What does zero-knowledge add to password encryption?

Zero-knowledge adds a guarantee about who holds the key: encryption and decryption happen only on your device, so the provider stores ciphertext and never has the key to read it.

Plenty of services encrypt data "at rest" with keys the provider controls. That protects against a stolen disk, but the provider, or anyone who compromises it, can still decrypt. In a zero-knowledge design the master password and the key it produces never leave your browser or app.

Sharing still works through public-key cryptography. Each item gets its own key, and that item key is wrapped (encrypted) separately for each teammate who should have access. Removing someone means re-wrapping keys for the people who remain. For a deeper walk-through, see zero-knowledge encryption explained.

The trade-off is recovery. If nobody else holds your key, nobody else can reset it, which is why an emergency kit or an opt-in recovery option matters.

Does password encryption make a vault unhackable?

No, password encryption protects stored data very well, but attackers go after the weaker points around it: the master password, the device and the people.

Weak master password: key derivation slows guessing; it cannot save a password like "Summer2024".
Malware on the device: once the vault is unlocked, a keylogger or malicious extension can see what you see.
Phishing: a fake sign-in page can capture what you type. Autofill that matches the real site helps here.
Reuse: a strong vault does not help if the same password is used on ten sites. See how to stop password reuse in a team.

Encryption is the floor, not the whole house. Pair it with unique passwords, two-factor authentication and quick offboarding when people leave.

How does BobWork Vault encrypt passwords?

BobWork Vault encrypts every item in your browser with AES-256-GCM before it is uploaded, and the server stores ciphertext only.

Here is how the pieces from this guide map onto it:

Key derivation: your master password is stretched with PBKDF2-SHA256 at 600,000 iterations, then HKDF splits it into an encryption key and a separate sign-in proof.
Per-item keys: each item has its own key, wrapped per teammate with P-256 ECDH, so team sharing works without the server reading anything.
New devices: signing in on a new device needs an emailed code as well as the master password.
Recovery: by default nobody, including BobWork, can recover a forgotten master password. Organisations can opt in to admin-assisted recovery, and an Emergency Kit is offered at sign-up.

It is a free password manager with team sharing included, working as a Chrome extension (also Edge, Brave and Arc) and a web vault. The full design is on the BobWork Vault security page. If you want to try it, create a free vault and import your existing passwords from a CSV.

Try BobWork Vault — free for your whole team

BobWork Vault is a free, zero-knowledge password manager for teams, made by BobWork (BobOffice, LLC). Shared folders, login-only access, 2FA codes and guided offboarding, end-to-end encrypted. Add it to Chrome or create a free account.

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Questions

Is it safe to store passwords encrypted with AES-256?

Yes, AES-256 is a well-established standard and is not the weak point in practice. The risks are a weak master password, malware on your device, or leaving the vault unlocked.

Can encrypted passwords be decrypted?

Yes, encrypted passwords can be decrypted by anyone holding the right key, which is the point of encryption. Hashed passwords, by contrast, cannot be reversed and can only be guessed.

Should a website encrypt passwords or hash them?

A website should hash passwords with a slow, salted function such as Argon2id, bcrypt or PBKDF2, as the OWASP Password Storage Cheat Sheet recommends. It has no need to recover the original password, so reversible encryption only adds risk.

What happens if I forget my encryption password?

In a zero-knowledge password manager, the data usually cannot be decrypted without it, because the provider never holds your key. Keep an emergency kit offline, and check whether your organisation offers an opt-in recovery option.

How do I encrypt passwords in a spreadsheet?

You can password-protect a spreadsheet file, but every person you share it with holds the whole file and the same password, and access cannot be removed per person. A password manager with per-item sharing is a safer way to encrypt passwords for a team.