How do password managers work?

A password manager creates a strong, unique password for every account so you only have to remember one. Most do it by encrypting your passwords into a vault that only your master password can unlock. A smaller group skips storage entirely and recalculates each password on demand from your master key.

Both designs solve the same problem. They fail in different ways, and knowing which is which is the difference between choosing well and choosing by brand recognition.

The problem being solved

Nobody can remember sixty distinct random passwords, so people reuse a few. That is the actual vulnerability. When any one site leaks its user table, attackers take the email-and-password pairs and replay them against banks, email providers, and retailers automatically. This is credential stuffing, and it is the attack that reaches ordinary people, because it needs no cracking and no targeting.

A password manager removes the shared secret. Every account gets its own password, so a leak at one site stays at that site. Everything else a password manager does is convenience built on top of that one structural change.

Architecture one: the encrypted vault

This is what almost every well-known manager does, including Bitwarden, 1Password, Dashlane, Proton Pass, and KeePass. It works in four stages.

Your master password becomes a key. The manager does not encrypt anything with your master password directly. It runs the password through a key derivation function such as PBKDF2 or Argon2, deliberately repeating the work hundreds of thousands of times. The slowness is the point: it makes each guess in an offline attack expensive. The output is a symmetric encryption key.

The vault is encrypted locally. Your passwords, usually with notes and card details, are encrypted on your own device with that key, typically using AES-256. What leaves your machine is ciphertext.

The ciphertext syncs. The encrypted blob goes to the provider’s servers so your phone and laptop can share it. The provider holds data it cannot read, which is the property usually marketed as zero-knowledge encryption.

Unlocking reverses the chain. Enter your master password, the key is derived again, the vault decrypts in memory, and autofill puts the right credential into the login form.

The strengths are real: it stores anything, it fills forms for you, it works with passkeys and shared team vaults, and losing your master password is often recoverable through an account-recovery path.

The weakness is that the encrypted vault exists, it sits on someone else’s infrastructure, and it is a permanent target. In 2022 attackers took customer vault backups from LastPass. The vaults were encrypted, but encryption is a delay rather than a wall once an attacker has unlimited offline attempts, and investigators later linked the theft of more than $150 million in cryptocurrency to those stolen vaults. Accounts on old, low-iteration settings were the ones meaningfully exposed.

Architecture two: derivation instead of storage

A deterministic password manager takes a different route. It does not keep generated passwords or PINs in a vault. It recomputes each one when you ask for it.

The inputs are combined and run through the same kind of slow key derivation function, and the output is mapped to a password of the length and character set you need:

master key + site name + account identifier + version + length  →  KDF  →  password

Because the function is deterministic, the same inputs always produce the same password. Change any input and you get a completely different one. That is how you rotate a single account without touching the others: bump that account’s version number.

MoolKey works this way. It derives in the browser using the Web Crypto API with PBKDF2-SHA256 at 600,000 iterations, and the generated password or PIN is not saved to MoolKey’s storage. Your master key is never sent to the backend. To be precise about what does get stored: the backend keeps the non-secret settings needed to rebuild a credential, such as the app name, a masked account identifier, the flow, the version, and the length. The secret itself is recreated rather than retrieved.

The honest trade-offs of this model are significant, and any manager in this category that hides them is selling you something:

• No recovery. There is no encrypted copy to restore. Forget the master key and the passwords are unreachable, permanently.
• Rotation needs bookkeeping. A vault just overwrites a field. Here, you have to know which version an account is on.
• Legacy passwords do not fit. Passwords created before you started cannot be derived, so there is nothing to import.
• Odd site rules cause friction. A site that caps length or bans symbols needs a per-account setting rather than a quick edit.

For MoolKey specifically there is more to disclose: it runs as a web app, an installable PWA, and a Chrome extension, with no native mobile or desktop app and no command-line tool. It does not autofill third-party sites, so you copy and paste. It has no passkey support, no import, and no published third-party security audit.

What is identical in both models

The parts people worry about most are the parts that do not differ.

Both derive a key from your master secret with a deliberately slow function, so master-secret strength dominates your security either way. Both do their cryptography on your device. Both leave you exposed to a compromised device, because malware that can read your keystrokes or your memory defeats any architecture. And neither one stops phishing if you type a real password into a convincing fake page, although autofill’s refusal to fire on the wrong domain is a genuine, useful hint that something is off.

What password managers do not do

They do not make a weak master password safe. They do not protect an account that has no second factor if the password leaks by another route. They do not remove the need for two-factor authentication. And they do not defend a device that is already compromised.

Choosing between them

Pick a vaulted manager if you want autofill, need to store notes, cards, or passkeys, share access with a team, or want a recovery path when you forget your master password. For most people this is the right default, and Bitwarden and KeePassXC are both credible.

Pick a derivation-based manager if the existence of a stored vault is the thing that bothers you, you are willing to accept that forgetting the master key is unrecoverable, and copy-and-paste instead of autofill is a fair price. It is a narrower fit, deliberately.

If you want the mechanics of the second model in more depth, read how MoolKey works and the storage boundary on the security page. The counterargument is worth reading too: the real problems with deterministic password managers.

Frequently asked questions

Where does a password manager store my passwords? In a vaulted manager, in an encrypted file on your device that syncs as ciphertext to the provider’s servers. Only a key derived from your master password can decrypt it. In a deterministic manager such as MoolKey, generated passwords are not stored by the service; they are recalculated from your Master Key and the account’s settings each time.

Can the company read my passwords? With a properly built zero-knowledge vault, no, because the encryption key is derived on your device and never sent. They can still see metadata such as which sites you have entries for. With a deterministic manager there is no vault to read, though non-secret account settings are stored server-side.

What happens if I forget my master password? A vaulted manager may offer recovery through emergency access, a recovery key, or an account-recovery contact. A deterministic manager generally cannot help, because nothing was stored to recover. MoolKey has no master key recovery.

Is a password manager safer than my browser’s? Usually yes, mainly because browser-based storage is often unlocked whenever your device is, and it rarely uses a separate master secret. See is your browser’s password manager actually safe? for the specifics.

Do password managers work offline? Vaulted managers can decrypt a local copy offline, though syncing new entries needs a connection. Deterministic managers are naturally offline, because derivation is pure computation. MoolKey includes an explicit offline generator for this reason.