Database was created with File > New Encrypted Database. The password was entered twice in the required fields. The local file has a .dtSparse extension.
When I right-click on the database and select Database Properties, there is nothing in the User and Password fields. I never set them to anything.
Does this clarify my setup?
I understand, this seems to confirm what I was suggesting above, i.e. DT needs, for the first sync at least, free space on the boot drive of a size at least equal to the size of the database being synced, regardless of the space available on the volume where it was asked to be saved locally (i.e. an external drive or network volume).