[Dovecot] Authentication with encrypted passwords

Hello,

I have a postgresql database which contains users that will access dovecot, but their passwords are hashed and I don't have them in plain text. I was reading documentation that you can add tell dovecot which password scheme should it use. For example:

password_query = "select '{MD5}'||password from users where userid=%u"

Which would mean that dovecot will hash the password with MD5 from client and match it with the one in database. Did I understand this correctly ?

Thanks, Sebastjan