[Dovecot] Authentication with encrypted passwords

[Sebastjan Trepca]

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