Encrypted Loopback Filesystem

Hello,

I am trying to play around loopback device and want to set up an
encrypted loopback filesystem. I did the following things:

1. losetup -e serpent /dev/loop0 /etc/crypt
/ect/crypt: Is a directory

So I tried: losetup -e serpent /dev/loop0 /etc/cryptfile and this time
cryptfile is a plain txt file.

Enter passwd...

2. mkfs -t ext2 /dev/loop0
3. mount -t ext2 /dev/loop0 /mnt/crypt

After this, how do I verify that anything happened that has enabled
encryption? I can't understand where the encrypted filesystem lies in
here:( Plus, when we say 'encrypted', which file is on earth encrypted?
Is that files and data in /mnt/crypt are encrypted form of
/etc/cryptfile? Really confused.

TIA!

Lei