Q:

How does Postgres host based authentication work? 

I am installing DSPACE which needs PostgresSQL. 
Please see this link: DSPACE INSTALL
It says:

Then tighten up security a bit by editing pg_hba.conf and adding this line:
host dspace dspace 127.0.0.1 255.255.255.255 md5.  

I have read on the internet as to how the above line works.  It needs a connection type followed by database name/user name followed by IP address and the authentication scheme. 
My question is: Should this not be a local (in place of host) connection since the dspace user is running locally? 
Can someone show me step by step as to what happens when a request comes in? 
Where are the instructions that the dspace user will submit a request using md5? 

A:

DSpace uses JDBC, so local won't work for it.   Here local means a completely different kind of inter-process connection that has nothing to do with IP and can only address local processes:  Unix sockets.   JDBC uses only IP, so DSpace needs a host descriptor. 
That period at the end of the line is not supposed to be part of it.   The documentation was unclear there -- I've fixed it. 
As Laurenz Albe noted, DSpace doesn't specify that MD5 password hashes be used.   The PostgreSQL server controls which methods will be tried, based on what you specify in pg_hba.conf.