How does Outlook know when you are typing in correct password

What settings in Outlook/Exchange know what your password is when signing into Outlook.  In my environment computers are on a domain and use domain\username to sign in to Outlook. 

Hi,
As far as I know, we need to enter password for Exchange account if the authentication method is NTLM. And here is the process about the authentication process:
1.Client sends NTLM Authentication Request to the server.
2.Server sends a 64-bit NTLM challenge to the client.
3.Client uses the challenge and an NTLM password hash to create an NTLM response.
4.The client sends the NTLM response to the server.
5.The server creates an NTLM response (since it also has your NTLM password hash) and compares its version with the one received by the client.
6.If the responses match, the authentication is successful.
If you have any question, please feel free to let me know.
Best regards,
Angela Shi
TechNet Community Support

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