Use your own words to explain a challenge-and-response authentication system. Why is this authentication technique better than using a password when passwords are so insecure?

Please elaborate so I may learn more about authentication challenge response systems. In contrast to what has been shown here, a system in which users are responsible for remembering passwords is very insecure.

Explain the challenge-response authentication mechanism and how it works. It is not immediately clear what makes it more secure than a normal password-based solution.

Explain what a challenge-and-response authentication system is in your own words. Please use your own terminology. Why is this authentication method preferable to using a password if passwords are so susceptible to security breaches?