My apologies to OP, this subthread risks obscuring his question.
When starting the topic I actually thought about not mentioning encryption as it easily tracks away a discussion. But to discuss a concept such details are important to be factored in. So it had to be :-)
-> I still hope to get more input on the original question. Advantages and Disanvantages of different protocolls and setups.
Password hash become actual password in server as server will not know how to verify it and just compare it as is.
That was my thought as well, if the hash is always the same, then an attacker could just send the recorded hash to gain access. If the hash is based on some kind of key that the server dynamically provides, that - to me - more sounds like encryption. But I never had much to do with these topics.
So discussions/suggestions regarding this topic are welcome as well.