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The FireFox master password is used to protect the master key for the FireFox browser on your computer. The master key is used to encrypt email passwords, web site passwords, and other potentially sensitive information stored by the Form and Password Manager on your computer.
The user creates an account. Their password is hashed and stored in the database. At no point is the plain-text (unencrypted) password ever written to the hard drive. When the user attempts to login, the hash of the password they entered is checked against the hash of their real password (retrieved from the database).