>    Question 1
>    ------------------
> 
>    What I'd like to know is, how insecure is our proposed scheme?

The entropy of your key will match the one of your password.
If the user chose a sequence of 7 letters, the effective key
length you would get is ~32 bits, which is not difficult to
brute force.

To make matters worse, the user will probably choose some
meaningful word, which drastically reduces the key space and
render a dictionary attack feasible.

If you think that theoretical key security is really a concern
AND if you think that trojans are not, I advice to force
the user to enter a long passphrase (rather than password).
37 characters are enough to reach a single DES level - probably
enough for your application.

>    Question 2
>    ----------------
> 
>    Can anyone suggest an alternative/better scheme which meets the
>    requirements above? i.e. peers authenticating to each other using just
>    a password?
> 
>    [I'm guessing that using hashes of passwords is a really bad idea
>    because of play-back attacks]

Passphrases as above. For mutual authentication, I would exploit the
fact that there is an online trusted server, that can sign and store
the public keys of the users (it does not need to see the private part).

Regards,

Ettore

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