Any advice on increasing difficulty

I've been playing for a couple of weeks, increasing the size of the galaxy, and getting the difficulty up to Normal as I learn the ropes. The problem is that it's too easy. I am unsure how difficulty has been implemented. Does Challenging mode mean that the AI gets smarter, or that it just starts "cheating" - extra hurdles for the player that the AI doesn't have to deal with, for instance.

Do all the AI races just become crazy aggressive?

I ask because I want to feel that I'm playing against smarter opponents, not frustrated because the cards have become unfairly stacked against me. I've played some games where the AI is clearly operating under different parameters than the player, and it becomes a lot less fun. I suppose a little inequality is fine.

Are there any notes on how this is handled?

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The AI starts cheating above normal. There's a list of cheats it gets somewhere in the forums.  I didn't find it bad on anything below "suicidal" though.  With the 1.1 opt in, the difficulty names were changed and I'm using the old 1.03 naming convention.

Giving the AI a slight edge is worth it IMO.  It kinda needs it now, although I'm starting to see the AI using ships that I designed in prior games against me. It's even using my naming convention, where I use my initials to distinguish between auto design and AI design. It's kinda cool to see.

Brad was saying that the AI will learn over time and get smarter. When that happens, he'll tone down the cheats.