Lauten isn't a very common verb, and it's not very easy to translate it directly into English. Literally the sentence is something like 'How does the password go?'. There are only a couple of other times I have come across the verb - 'Wie lautet die Addresse?' (What's the address) 'Der Brief lautet, dass...' (The letter says that...).
There needs to be an explanation for stuff like this. You can't learn by just guessing and then being told youre wrong...
It works when you're told the correct answer; I got a bunch wrong my first time through and then got them right the second time through. Reading a paragraph explaining what goes where would take even longer, imho. Trial and error is the name of Duolingo's game.
I'm not so sure about the construction of this grammatically, can anyone help?