docs: add encryption architecture documentation

[nullcoder]

Description

Document the encryption implementation for future developers and security auditors.

Tasks

• Create docs/ENCRYPTION.md with:
  • Architecture overview
  • Security considerations
  • Implementation details
  • Usage examples
• Add inline code documentation
• Create security best practices guide
• Document threat model

Acceptance Criteria

• Clear architecture documentation
• Security considerations documented
• Code examples included
• Threat model defined