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The key is not stored with the encrypted data, the encrypted key is. This is part of the header. In short, when the volume is created a random key (the master key) is generated and this random key is encrypted using a key derived from the passphrase, and spread out (using an algorithm called 'afsplit'). This key derivation is designed to take a relatively ...

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Suppose you use the sector number times the number of AES blocks per sector as the initial value for CTR. If you successively store the content $M$ then $M'$ in the same sector $n$ then $E^{CTR}_n(M) \oplus E^{CTR}_n(M') = M \oplus M'$ (where $E^{CTR}_{n}$ is the encryption function with CTR mode and IV started for sector number $n$). CTR mode fails ...

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One answer would be nonce space: adding a tweak significantly increases the number of different nonce-tweak options you're allowed, thus increasing the maximum data that can be safely encrypted with a single key. Update: In his modes paper, Rogaway quotes an earlier source the CTR was dismissed due to trivial malleability. This makes a lot of sense, since ...

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If you don't mind that the ciphertext is longer than the plaintext, GCM is perfectly fine for storage encryption. Every time you write a block to disk, choose a fresh nonce and write the resulting ciphertext to disk. (You can ask for even stronger security properties, but then everything gets more expensive. Basically, build a tree structure for tags. Reads ...

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