Here’s iOS file system / PIN encryption as I understand it. I originally pastebin’d this but folks thought it was worth keeping around. (Thanks to Andrey Belenko for his suggestions for edits).
Block 0 of the NAND is used as effaceable storage and a series of encryption “lockers” are stored on it. This is the portion that gets wiped when a device is erased, as this is the base of the key hierarchy. These lockers are encrypted with a hardware key that is derived from a unique hardware id fused into the secure space of the chip (secure enclave, etc). Only the hardware AES routines have access to this key, and there is no known way to extract it without chip deconstruction.
One specific locker, called BAGI, contains an encryption key that encrypts what’s called the system keybag. The keybag contains a number of encryption “class keys” that ultimately protect files in the file system; they’re locked and unlocked at different times, depending on user activity. This lets developers choose if files should get locked when the device is locked, or stay unlocked after they enter their PIN, and so on. Every file on the file system has its own random file key, and that key is encrypted with a class key from the keybag. The keybag keys are encrypted with a combination of the key in the BAGI locker and the user’s PIN.
There’s another locker in the NAND (what Apple calls the class 4 key, and what we call the Dkey). The Dkey is not encrypted with the user PIN, and in previous versions of iOS (<8), was used as the foundation for encryption of any files that were not specifically protected with “data protection”. Most of the file system at the time used the Dkey instead of a class key, by design. Because the PIN wasn’t involved in the crypto (like it is with the class keys in the keybag), anyone with root level access (such as Apple) could easily open that Dkey locker, and therefore decrypt the vast majority of the file system that used it for encryption. The only files that were protected with the PIN up until iOS 8 were those with data protection explicitly enabled, which did not include a majority of Apple’s files storing personal data. In iOS 8, Apple finally pulled the rest of the file system out of the Dkey locker and now virtually the entire file system is using class keys from the keybag that *are* protected with the user’s PIN. The hardware-accelerated AES crypto functions allow for very fast encryption and decryption of the entire hard disk making this technologically possible since the 3GS, however for no valid reason whatsoever (other than design decisions), Apple decided not to properly encrypt the file system until iOS 8.