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To create the image, follow the FAQ entry, but set an encryption option. A sparse image is one of the image types -- the FAQ has the data there.
You can open the sparse image if you have the password. Once open, it's just like any other volume, and you can use SD! to do what you'd like. As a destination, we'll automatically handle it like any other sparse image as long as your password is in the keychain. A sparse image can't back up itself (can't be stored on the volume you're backing up, since that'd be a "hall of mirrors" effect). There's no difference between DU creating a sparse image and SD doing it, since we use DU to do the create. There are just more options.
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