Password encryption: What is it and how does it work?

As companies rapidly shift towards cloud-based environments, employees find themselves juggling multiple accounts across a variety of platforms, each one most likely safeguarded by a password. These digital keys are often the first (and sometimes only) line of defense against unauthorized access to sensitive data, making them a prime target for cybercriminals. 

But in an age of increasingly sophisticated cyber threats, simply having a password isn’t enough; we need to ensure those passwords are secure. This is where encryption comes into play. Research predicts the Data Encryption market will grow from USD 14.5 billion in 2024 to USD 40.3 billion by 2032. This notable annual growth of 16% emphasizes the increasing demand for secure methods to protect digital information – particularly passwords. 

In this article, we’ll explain what encryption is, how it works to protect passwords, and the best practices organizations can follow to stay ahead of evolving threats. 

What is encryption? 

Encryption is the process of converting data into a coded format that can only be read or accessed by someone with the correct decryption key. The goal is to make sure that even if sensitive information – like a password – is intercepted, it remains unreadable and secure from unauthorized access. 

Encryption is widely used today to protect data at rest (stored data) and data in transit (data moving across networks), including passwords, online transactions, emails, and more. 

How does encryption work? 

Encryption works by using algorithms to convert readable data – like a password – into an unreadable format called ciphertext. This transformation helps keep sensitive information safe, even if it’s intercepted or accessed by someone without permission. To read the original data, you need a special decryption key that unlocks and restores the scrambled information to its original plaintext form.  

For example, let’s say your password is “Banana5Cloud9Mouse0”. When you enter it into a system that uses encryption, it will be converted into a seemingly random string of characters, such as “SxE1y8BIOSdAO/nSGwughmGeO0FN0E0YMIghibgA8Lk=”.  

This encrypted string of characters is known as ciphertext, and this is what will be stored and transmitted instead of the original plaintext password. This means that even if a hacker were to steal the encrypted password, they wouldn’t be able to use it unless they have the decryption key. 

Password encryption methods 

There are a few different types of encryption, each with their own advantages and weaknesses. The two most common methods are symmetric encryption and asymmetric encryption. 

Symmetric encryption 

Symmetric encryption is the most well-known and widely used encryption method. It involves using the same cryptographic key for both encryption and decryption, meaning that both the sender and receiver must have access to the exact same key to exchange information. This approach is generally quick and efficient, making it a popular method for handling large amounts of data. 

However, there is one major challenge to symmetric encryption: securely sharing the key between parties. If the key is intercepted during transmission, the entire encryption system may become compromised, making it vital to store and share the secret key safely. 

Asymmetric encryption 

Unlike symmetric encryption, asymmetric encryption uses two different keys: a public key for encrypting data, and a private key for decrypting data. As the name suggests, the public key is made publicly available for anyone to use. The private key, however, is kept secret.  

Asymmetric encryption is much more secure than symmetric encryption, because the encryption and decryption keys are separate, eliminating the need to share a secret key over potentially insecure channels. However, it is also much slower than symmetric encryption, so it’s typically used to encrypt small amounts of data (such as keys or authentication tokens) rather than large files or bulk data. 

Hashing vs encryption: What’s the difference? 

Hashing and encryption are both techniques used to protect sensitive data, but they serve different purposes and work in fundamentally different ways.  

Encryption is a two-way process: it transforms readable data into an unreadable format, and with the correct key, the data can be decrypted back to its original form. This makes reversible encryption ideal for protecting data that needs to be accessed or transmitted securely. 

Hashing, on the other hand, is a one-way function that converts data – like a password – into a fixed-length string of characters called a hash. Once data is hashed, it’s impossible to reverse it and retrieve the original password. Because of this, hashing is a popular way to store passwords securely, as there is no need to decrypt them; hashes are simply compared to verify a match.  

Salting 

Although password hashing is popular, it has a major weakness: identical passwords produce identical hashes. This means if two users choose the same password, their hashed values will also be the same, making it easy for hackers to spot common passwords in a stolen database. 

To defend against this, a technique called salting is used. Salting adds a unique, random value to each password before it’s hashed, which means that even identical plaintext passwords will generate completely different hashes.  

Common encryption algorithms 

An encryption algorithm is the set of rules and procedures used to convert plaintext into ciphertext. There are a lot of encryption algorithms available, some more popular than others.  

Here are some of the most common: 

Advanced Encryption Standard (AES) 

AES is a type of symmetric encryption algorithm developed by the National Institute of Standards and Technology (NIST). It is generally considered the gold standard of encryption algorithms, trusted by the US government. It encrypts data using key sizes of 128, 192, or 256 bits, offering strong protection against attacks.  

Secure Hash Algorithm 2 (SHA-2) 

SHA-2 is a family of hashing algorithms, with SHA-256 being the most frequently used. SHA-2 was designed by the National Security Agency (NSA) as a more secure successor to SHA-1, and is used in a wide range of applications, including password hashing. 

Bcrypt 

Bcrypt is another type of hashing algorithm that automatically incorporates a unique salt for each password. It also uses a cost factor, which controls how many times the password is hashed, allowing the algorithm to slow down the hashing process and resist attacks.  

Triple Data Encryption Standard (3DES) 

Data Encryption Standard (DES) is a symmetric encryption algorithm developed in the 1970s that was once considered the gold standard. 3DES is an evolution of DES, which applies the DES algorithm three times with three different keys. 3DES is more secure than the original DES, however it is still considered outdated and has largely been replaced by modern algorithms like AES. 

Rivest-Shamir-Adleman (RSA) 

RSA is an asymmetric encryption algorithm that uses a public key for encryption and a private key for decryption. RSA has been around for a long time now, but is still widely used to securely transmit data, such as SSL certificates.  

Message Digest 5 (MD5) 

MD5 is a hashing algorithm that converts any input into a fixed 128-bit value, usually shown as a 32-character hexadecimal number. While once widely used, MD5 is now considered insecure because it’s vulnerable to modern cracking methods. It often appears in data breaches and leaked password databases. 

Benefits of password encryption 

Helps prevent data breaches 

Encrypting passwords means that even if an attacker gains access to a database, the stolen credentials remain unreadable and unusable without the decryption keys. This drastically reduces the chances of a successful breach leading to compromised user accounts. 

In combination with password encryption, methods such as Full Disk Encryption (FDE) can further minimize risk by protecting the entire storage system. This makes it nearly impossible for attackers to access sensitive data if a device is lost or stolen. 

Helps comply with legal and industry standards 

Password encryption plays a key role in helping organizations comply with legal and industry standards designed to protect sensitive data. Regulations like GDPR and HIPAA require strong safeguards for personal information and sensitive data, and encryption is a widely recommended method to meet these requirements.  

Boosts user trust 

Encryption boosts user trust by demonstrating that an organization takes data security seriously and is committed to protecting sensitive information like passwords. When users know their data is encrypted, they can be confident that even if a breach occurs, their personal information is less likely to be exposed. 

Protects against insider threats 

Security strategies tend to focus on defending against external attackers, but insider threats – whether intentional or accidental – can be just as dangerous. Password encryption helps to make sure that even employees with access to databases cannot see or misuse users’ passwords.  

Best practices for encryption 

1. Encrypt all sensitive data: Encrypting all sensitive data is vital to provide comprehensive protection across your entire system. Data like personal information, financial details and medical records are all valuable targets for attackers. Encrypting this information both in transit and at rest significantly reduces the risk of exposure in the event of a breach. 
2. Use strong, modern algorithms: The algorithm you use to encrypt data is crucial to its security. Outdated or weak algorithms like MD5 or SHA-1 are vulnerable to attack and can be cracked with modern tools. Instead, you should employ modern, secure algorithms like AES for encryption and bcrypt for hashing to provide robust protection. 
3. Salt passwords: Hashing alone is not enough to protect passwords from threats like rainbow table attacks and dictionary attacks. With enough time and resources, threat actors can use these methods to identify the value of a hashed password – particularly if it’s a common one. To safeguard against this, passwords should always be salted in addition to being hashed, rendering them unique and much harder to crack. 
4. Multi-layered security: Although encryption is a vital layer of defense, on its own it isn’t enough to protect against modern cyber threats. It’s important to also implement multi-factor authentication to add an additional verification step beyond just a password. Enforcing strong password policies – like preventing password reuse and blocking common or predictable patterns – also helps reduce the risk of compromised credentials.  
5. Monitor for weak or breached passwords: As mentioned above, although encryption is a critical layer of defense, it doesn’t eliminate the risk of passwords being stolen. Weak or reused passwords can still be easily cracked, even when encrypted. That’s why it’s essential to actively monitor for weak or breached passwords. Tools like our free, read-only Specops Password Auditor can help you identify and respond to potential vulnerabilities before attackers can exploit them. 

The future of password encryption  

The digital world is expanding rapidly – and, unfortunately, that means threats are evolving too. Verizon’s 2024 Data Breach Investigations Report found that nearly 80% of web attacks are driven by stolen passwords, highlighting the need for encryption technologies to evolve alongside the threats they aim to combat. 

Post-quantum cryptography 

Quantum computers are powerful machines – potentially powerful enough to eventually break widely used encryption methods like the ones discussed above, rendering much of today’s digital security obsolete.  

This is an alarming idea. However, fortunately, quantum computing also enables us to explore new, post-quantum cryptography methods that could actually strengthen security. This is an evolving field, with experts exploring several possible approaches to developing post-quantum algorithms. Their development will be crucial for protecting sensitive data in the long term, especially as progress in quantum technology accelerates.  

Rise of passwordless authentication 

As companies search for ways to protect themselves from breaches, phishing, and other cybersecurity threats, they are increasingly turning towards passwordless authentication methods. In fact, the passwordless authentication market is projected to grow from USD 21.6 billion in 2025 to USD 60.3 billion by 2032.  

Biometric technologies – such as fingerprint scanning and facial recognition – are among the most prominent examples of this shift. These methods are generally convenient for users and reduce the risk of credential theft, as there are no traditional passwords to steal or reuse. Similarly, passkeys are a newer authentication method that can use biometrics to verify identity, without the need for a traditional password. 

However, even in a passwordless environment, encryption remains a vital component of digital security. Storing and transmitting unencrypted biometric data could expose users to serious privacy risks, as this kind of data is uniquely tied to individuals and can’t be changed if compromised. This is why even the most advanced authentication systems must be built on a strong foundation of encryption to offer long-term security and trust. 

Continuously monitor for weak and compromised passwords  

Encryption is essential for protecting sensitive data like passwords – but it doesn’t prevent users from reusing weak or stolen passwords. Even the strongest encryption algorithms can’t stop a breach if compromised credentials are used to gain access. 

That’s why it’s vital to proactively monitor for weak and compromised passwords. Specops Password Policy with Breached Password Protection actively checks passwords against a growing database of over 4 billion known compromised credentials, including ones being used in real attacks today.  

The Breached Password Protection service blocks banned passwords in Active Directory, preventing users from setting or using passwords that have been exposed in data breaches. It works seamlessly in the background, enforcing your password policy in real time without disrupting the user experience. 

Interested in finding out how this could work for your organization? Contact us today for a demo or free trial. 

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