Encrypting data on a VPS, for example using LUKS encrypted volumes, does not provide any meaningful security if the host can take a memory dump of the running machine.
And just to clarify: taking a memory dump of a virtual machine is trivial. Just click on the 'snapshot' button.
On a physical machine, you have to plug in a dumping device into a DMA-capable port, cool down the RAM and move it to another machine as fast as possible, or reset the machine and boot it from another medium (hoping the BIOS didn't override anything useful). In many jurisdictions you also have better protections in regards to required warrants and such for your own hardware.
Excellent point. I highly doubt a VPS provider would volunteer a memory dump of a VM when presented with a search warrant for a copy of the VM. Most providers would likely just copy the VM files and call it a day.
On a physical machine, you have to plug in a dumping device into a DMA-capable port, cool down the RAM and move it to another machine as fast as possible, or reset the machine and boot it from another medium (hoping the BIOS didn't override anything useful). In many jurisdictions you also have better protections in regards to required warrants and such for your own hardware.