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One of the security expert here suggested me to apply encryption at guest(virtual machine) level rather than applying at host level with good reason. Before applying that I want to know what can be the possible performance issues in both cases. Will performance be worst in guest level encryption or vice versa? I want to have some theoretical knowledge before implementing it. Many thanks in advance.

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While I haven't got any data to support, a big problem with Virtualization is that the I/O performance tends to drop dramatically. Now encryption can have a small impact on cpu usage, but definitely the I/O might get hit. So make sure you have fast enough storage to cope with this overhead (you don't want to be using 7.2k rpm sata drives but 10-15k SAS drives or even SSDs).

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