Rsync daemon, if it isn't using ssh, how does it authenticate the user trying to transfer data?

I understand that you can avoid ssh authentication with rsync daemon, but what method of authentication is it using then? How is it transferring the data?

The rsync daemon, without SSH, provides anonymous access and/or it's own username/password authentication methods as part of the protocol.

On the server side you configure a plain text file with the users and their (unencrypted) passwords and for each module you can mandate authentication and define which users are allowed to authenticate.

Note that the rsync protocol is clear text and sniffing usernames and passwords is trivial.

The manual page offers guidance on how to configure that:

   A simple rsyncd.conf file that allow anonymous rsync to a ftp
   area at /home/ftp would be:

       [ftp]
               path = /home/ftp
               comment = ftp export area

   A more sophisticated example would be:

       uid = nobody
       gid = nobody
       use chroot = yes
       max connections = 4
       syslog facility = local5
       pid file = /var/run/rsyncd.pid


       [cvs]
               path = /data/cvs
               comment = CVS repository (requires authentication)
               auth users = tridge, susan
               secrets file = /etc/rsyncd.secrets

   The /etc/rsyncd.secrets file would look something like this:

       tridge:mypass
       susan:herpass