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Passwords or Pass Phrases are a string that is used to help lockout people who do not know this string from using frontend or backend account.
It is used to make sure that anyone trying to connect to the magento website is who they say they are. In addition to a user-name which may be a another string or the person's email, it makes the server that the person who is trying to login(gain authorization to the website) more likely to trust them and allow them to gain access to it.