The password scenario is the first scenario in Challenge Response Module. It shall be your first step toward general subject matter of authentication and challenge response method.
If you click on Authentication client a secret password will be sent from client to server. This is known to the server (viz client and server 1 agreed on a password via a secured channel before) and it compares the password forwarded with its own. If they match the server accepts the client’s identity and he is authenticated.
Your task as attacker is to spy out the password and use it in order to be accepted by the server as a client as well. If you succeed more catchy challenge referring to one-time password method awaits you. If you fail to find a solution you can get one here.
In the real world passwords are current. They protect most computer systems and also many internet sites (like e-mail services). By PINs banks use passwords for their ATMs likewise.
One example for unencrypted transmission of passwords is the classic FTP (File Transfer Protocol) data exchange via the internet. Meanwhile implementations with encodings are also available (e.g. SFTP Secure File Transfer Protocol).