Client Authentication methods

Hi All,

I am trying to understand the Authentication method in pg_hba.conf file
(password & md5) in PostgreSQL database server.

I am assuming that the user provides the connection string
host/usser/password,then client will go and contact the DB server
pg_hba.conf file in memory without carrying password over the network
initially, and then it confirms the authentication method from pg_hba.conf
,then it decides weather it send clear text or md5 encrypted password from
client to Server to make a session?

Is my assumption is correct ? or What exactly it make the difference for
client if i use md5/password in pg_hba.conf file in DB server?.

Thanks,
chiru