Magento follows the below steps to encrypt the password. This encypted passowrd will be stored in the database.
Let suppose your password will be "test123". Magento will add auto generated slot variable for this password. Let the auto-generated slot is "BJ".
The following is code for generating the hash.
echo Mage::helper('core')->getHash('test123', 'BJ');
Printed variable is the one stroed in the database.
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