The usernames used for WWW access control are entirely unrelated to other usernames. The file passwd is an ordinary text file, but the passwords it contains are encrypted. Depending on how fine-grained a protection you want you can allow several, or many, people to use the same username and password, or you can set up unique usernames and passwords for each person. Which is the preferable choice depends on the level of security you need. Only the named users can access the directory.
All valid users can access the directory.
This can be used to password restrict an area, but to let clients from particular addresses in without prompting for a password.