How does challenge/response work?
When the authentication process begins, the user’s system (client) sends a login request to the telnet server. The server replies with a randomly generated “token” (or challenge) to the client. The client hashes the currently logged-on user’s cryptographically protected password with the challenge and sends the resulting “response” to the telnet server. The telnet server receives the challenge-hashed response and compares it to what it knows to be the appropriate response. (The server takes a copy of the original token – which it generated – and hashes it against what it knows to be the user’s password hash from its own user account database.) If the received response matches the expected response, the user is successfully authenticated to the host.