I have basically a username is unique (case insensitive), but the case matters when displaying as provided by the user.
I have the following requirements:
Store the original mixed-case string in a plain text column. Use the data type text or varchar without length modifier rather than varchar(n). They are essentially the same, but with varchar(n) you have to set an arbitrary length limit, that can be a pain if you want to change later. Read more about that in the manual or in this related answer by Peter Eisentraut @serverfault.SE.
Create a functional unique index on lower(string). That's the major point here:
CREATE UNIQUE INDEX my_idx ON mytbl(lower(name));
If you try to INSERT a mixed case name that's already there in lower case you get a unique key violation error.
For fast equality searches use a query like this:
SELECT * FROM mytbl WHERE lower(name) = 'foo' --'foo' is lower case, of course.
Use the same expression you have in the index (so the query planner recognizes the compatibility) and this will be very fast.
As an aside: you may want to upgrade to a more recent version of PostgreSQL. There have been lots of important fixes since 8.4.2. More on the official Postgres versioning site.