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The "password is a key" feature, also known as "localized key" means that the hash is computed using a combination of the user defined password and from the SNMP agent's engine ID. This feature can be used instead of plain text authentication on SNMP devices.
Each SNMPv3 agent has an engine ID that uniquely identifies the agent on the device. If a device gets compromised, no other managed or managing devices are affected by it.
If your devices support localized keys and the SNMP settings on your device are set up for authentication with the localized key (hash), you must also make appropriate changes in the node settings.