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So I'm guessing this password is stored server-side and the passwords are associated to device ids.
Seems like it would read your contacts and then send them to their servers too, not a fan of doing that personally.
I'm not sure why the app mentions encryption/security as it seems far from being the main point of the app.
The server does not have copies.
P.S. Get a friend to download it as well as it requires both parties to have each other contacts saved and the app installed in order to send / receive messages.
The most obvious way I see to support this feature is to build up a big table of contact connections, so that when I join and put in my phone number it can send up my list of contacts and find all the bidirectional connections to what's already in the database.
This means you're building up a big graph of how all your users are connected to each other, and to people who don't use Wave (yet). Is that not 'harvesting' the contacts? Do you do it a different way?
To send and receive messages, the app needs access to your contacts. When you tap 'send' for the first time, the app will ask you for permission to access your address book.