What is challenge-response?

Challenge-response is an interactive procedure for proving knowledge without revealing it: the prover solves one or more challenges from the verifier, and only someone who knows the secret can produce the correct response with high probability.

* Proving knowledge of a secret without transmitting it. *

It underlies most cryptographic authentication: signing a nonce with a private key proves possession without ever transmitting the key.

Go deeper:

• Challenge-response authentication (Wikipedia) — the protocol family, from simple passwords to cryptographic variants.