Howto: syncing with external hard drive
What is the best way to sync with an external hard drive using the sync feature in Z?
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You can - and should! - use the regular back-up sync of your external hard-drive to back-up Zotero
http://www.zotero.org/support/zotero_data#how_do_i_back_up_my_zotero_library
but you cannot use Zotero's sync features with a local drive - to sync files you either need to use Zotero file storage or a WebDav server.
Note, though, that the WebDav only syncs the files - the data would still sync with Zotero - free of charge regardless of size/volume.
The Zotero server code is available so, theoretically, the entire infrastructure can be hosted on an internal or third party server, but, to my knowledge, no one has done that yet.
Alex has started this here:
http://www.zitation.org/docs/start
though it never went very far - but that site also has links to the code and existing documentation by Zotero.
http://www.zotero.org/support/sync
distinguishes between data syncing and file syncing.
data syncing is always with Zotero - it syncs the citation data as well as notes.
File syncing (i.e. the syncing of attachments) can be done with a WebDav or with Zotero File Storage, which is non-free over 100MB.
But even if you use the WebDav server, the data (i.e. everything but the attachements) will still sync with Zotero's Server. In fact, it's impossible to sync just the files/attachments.
(that would require the setup I describe above - i.e. running the entire Zotero server structure locally).