Prior to password shadowing, a Unix user's hashed password was stored in the second field of their record in the /etc/passwd file (within the seven-field format as outlined above).

Password shadowing first appeared in Unix systems with the development of SunOS in the mid-1980s,[11] System V Release 3.2 in 1988 and BSD4.3 Reno in 1990. But, vendors who had performed ports from earlier UNIX releases did not always include the new password shadowing features in their releases, leaving users of those systems exposed to password file attacks.

System administrators may also arrange for the storage of passwords in distributed databases such as NIS and LDAP, rather than in files on each connected system. In the case of NIS, the shadow password mechanism is often still used on the NIS servers; in other distributed mechanisms the problem of access to the various user authentication components is handled by the security mechanisms of the underlying data repository.

In 1987 the author of the original Shadow Password Suite, Julie Haugh, experienced a computer break-in and wrote the initial release of the Shadow Suite containing the login, passwd and su commands. The original release, written for the SCO Xenix operating system, quickly got ported to other platforms. The Shadow Suite was ported to Linux in 1992 one year after the original announcement of the Linux project, and was included in many early distributions, and continues to be included in many current Linux distributions.

In the past, it was necessary to have different commands to change passwords in different authentication schemes. For example, the command to change a NIS password was yppasswd. This required users to be aware of the different methods to change passwords for different systems, and also resulted in wasteful duplication of code in the various programs that performed the same functions with different back ends. In most implementations, there is now a single passwd command, and the control of where the password is actually changed is handled transparently to the user via pluggable authentication modules (PAMs). For example, the type of hash used is dictated by the configuration of the pam_unix.so module. By default, the MD5 hash has been used, while current modules are also capable of stronger hashes such as blowfish, SHA256 and SHA512.