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Usually, passwords are not tried one-by-one against a system's secure server online; instead, a hacker might manage to gain access to a shadowed password file protected by a one-way encryption algorithm. They would then test each entry in a file like this to see whether its encrypted form matches what the server has on record.
With a shadowed password scheme in use, the /etc/passwd file typically shows a character such as '*', or 'x' in the password field for each user instead of the hashed password, and /etc/shadow usually contains the following user information: User login name; salt and hashed password OR a status exception value e.g.: