1. You produce an "authentication hash" X = hash(normalize(your_username) + your_password) and send X to the server.
2. The server computes Y = hash(X) and checks Y against the stored hash.
Now you're not sending the plaintext password to the service (e.g. steam), and steam is also not storing the "raw" authentication hash X on the server either. Yes, a manipulated client can send a stolen X instead of a stolen password (but in reality it's a reused password that's been stolen, not X). The advantage is that a compromised server will then not be able to log the plaintext password for credential stuffing.
In case anyone thinks about using the above scheme: Don't. It's merely an illustration for one specific property. Other than that it is PAINFULLY flawed in many ways.