I'll bet most search results with the keywords ESXi and iSCSI assumes hosting VM's on SAN.
In your case the VM's are hosted on DAS and the iSCSI store is for backup traffic only. The runtime requirements for running VM's over iSCSI and backing up over iSCSI are completely different. You won't find many articles describing ESXi performance over iSCSI file shares.
It's complicated.
I'd go for the simplest solution: NFS.
Little if any performance negatives.
Much easier configuration, troubleshooting and testing.
But it's not only about the numbers is it? SCSI over IP is just so cool.
You have to pay for vSphere with its various modules and extra features but not to use the vSphere Client to connect to a free ESXi.
I think where you may be getting the license message from is although ESXi is free, you still need to request a free license key from VMWare.
Login to your ESXi box with vSphere Client and go to Configuration -> Licensed Features -> Edit.
If you are set to evaluation mode, that is what you are getting the license warning from.
VMWare should have emailed you a license key when you signed up on their website to download ESXi. If not, you can go through the download steps again and the license key should be on one of the pages.
For me, if I go to https://www.vmware.com/products/esxi/ hit Download, login with my free VMWare account, then on the page with all of the download links, at the top of the list is my ESXi License.
The reason you are seeing the license message about vSphere is that in the Evaluation mode, some of the extra features that are only available with vSphere are enabled, once you enter a free ESXi license, those will be disabled and you won't get prompted anymore.
Also, you can use the vCenter Converter in the standalone mode (runs off of your workstation) for free with ESXi. This tool is immensely useful for moving VMs on and off of ESXi. http://www.vmware.com/products/converter/.
Best Answer
There's no way (yet) for the actual VMFS datastore to be encrypted, it's just not part of the VMFS3 spec, nor is part of the VMFS5 spec as far as I know. That said there are some Brocade parts that will allow for 'on-array' encryption without any knowledge of this by the hosts themselves, plus there are some ways that they can do over-the-fibre encryption that I know work with Windows and Linux but I'm not sure the same support is there for ESX/ESXi.
By the way we tend not to discuss unreleased code on serverfault as the site's about professional production systems and we generally feel that running unsupported code in such an environment is inherently unprofessional. Just for future notice.