To summarize the approach in the PDF, they reverse-engineered the wire format used to update the client. The extension encrypts small sections of the document (as small as individual characters) with block ciphers. The ciphertext is then sent to Google over the reverse-engineered wire format.
Since they aren't sending actual text to Google, they don't have access to server-provided features like spellchecking or exporting, and they didn't try to handle simultaneous collaboration. However, they assert that if you share your extension's settings for a particular document, your collaborators can all get updates, they just can't type when you type. They also found they hit Google's document size limit pretty quickly, since encrypting individual characters makes the document 16x larger.
In exchange, they claim this gives them enough security to update documents over an insecure channel (they cite China blocking https access to Docs as a compelling example), and Google only stores an encrypted form of the document, so the contents are unrecoverable by Google.
"Correction: this is a pretty good way to do it. There’s still some big information leaks; [...] For example, a letter responding to a job applicant is likely to be shorter if they got rejected, and longer if they’re hired. And you can do much lower-level analysis, [e.g. sshow-like or keystroke timing attacks]. [...]
Remember that doing bulk statistical analysis of incremental ciphertext edits to gleam as much information as possible is the kind of application that Google’s infrastructure is perfectly designed for!" -- Jim
Given how hard Google is working to earn the trust of businesses with regard to Google Apps, I highly doubt they would be stupid enough to risk getting caught spying on individual documents.
Eh, okay... but if it doesn't handle simultaneous edits, and considering the dual security problems of timing attacks and "Google Docs could just add some code to confuse the Firefox extension and steal your keystrokes", is it really better than sticking an encrypted file in Dropbox?
Free storage? You could store a gazillion word processing and spreadsheet documents on a normal hard drive (and back them up on Dropbox if necessary). Awesome software? Hardly (and I've used them for years before I switched back to desktop programs). The word processor still has bugs that should have been weeded out years ago.
So the question is relevant: Why not just use LibreOffice?
Since they aren't sending actual text to Google, they don't have access to server-provided features like spellchecking or exporting, and they didn't try to handle simultaneous collaboration. However, they assert that if you share your extension's settings for a particular document, your collaborators can all get updates, they just can't type when you type. They also found they hit Google's document size limit pretty quickly, since encrypting individual characters makes the document 16x larger.
In exchange, they claim this gives them enough security to update documents over an insecure channel (they cite China blocking https access to Docs as a compelling example), and Google only stores an encrypted form of the document, so the contents are unrecoverable by Google.