Basically, when your database stores data, it stores it in a way such that it can be read by anyone with the specialized software, I believe it is a sector editor, and the time to root thru your hard drive until they find your database data. I have used a text editor that enabled me to root thru a hard drive reading the data.
Encryption simply scrambles the values stored on the hard drive so that they can no longer be read by someone with the specialized software.
Be aware that there is a performance hit, as the data must be decrypted for ordinary use and then re-encrypted when stored on the hard drive.
As Frank noted, you'll take a performance hit in using encryption. As in most security matters, you need to consider the importance of the data being protected and assess the risk to that data. Are you simply trying to limit access to your data within your own employees, or are you trying to prevent data from being accessed from the outside by your competetion?
It should be noted that the majority of malicious damage done to IT systems is not done by hackers breaking into a system, but rather by disgruntled employees who have legitimate access to the system. For this reason, only employees who have an actual need for access to the various modules of your system should be granted priviledges.
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