Actually, if you follow the code, you'll see the functions that are called, however, they aren't in that file.

The functions you want are in functions.inc.php, they are generate_pw_hash, to create the password, and is_pw_correct, to verify it on login. The functions are pretty straight forward and use the php sha1() function. If you've never used it or worked with salted hashes, you should google for a tutorial on salted hashes to get the basic idea of what is being done.

I hope that helps you