Plausible deniability is a feature you want if you’re worried about the authorities seizing your machine. It’s not the first-line-of-defense if you’re trying to defend against compromise.

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The point of isolating VMs is to isolate compromise. It makes no sense to have VMs that are easily identifiable and unencrypted. If a running machine is compromised FDE doesn't help. But isolated encrypted machines with correctly configured permissions do.

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