You seem to have misunderstood the point of this. It is to find additional ways for Authentication.
The Default way for a Whitelist based Server will ALWAYS be the Version where you send the Host your Public Key, even if you just freshly generated one for use with that specific Server. This will be made super easy and can be as simple as “Push Button in Launcher to copy Public Key to Clipboard”.
The main reason for me to ask around for alternatives is because some Servers may not want to be Whitelist based, and need simple ways to Authenticate people.
When you join a Server once, it will tell your System to select the way of Authentication for the Future, which by default is the Key (which by the way CAN be cryptographically password protected too), but may also be a Yubikey or the TPM Chip of your Computer, or any combination of those 3 things. That way the Server knows for sure that you are the same person who you were last time you joined.
So overall, having multiple Users on the same Computer does not mean it is unsafe to use the built in TPM, since you can also combine TPM with a Password, or TPM with a Key, or TPM with a Yubikey, or TPM with a Key that is password protected.
Obviously you would not use the TPM of a Computer you dont own, you can always just go to other Auth ways just fine. Key alone, Password alone, Yubikey alone, or Password protected Key are also possible options you can choose.
And yes obviously Passwords would be stored in a cryptographically secure way, and not in something blatantly stupid like plaintext.
Servers will pretty much always at least use Keys to verify that you are who logged in last time, and if you lose the Keys, you will have to message the Host in some way, to let you re-verify yourself. And if you have multiple ways to authenticate yourself, even if it is a one-time-single-use-code that you made when joining the first time or so, you will not even have to message the Host at all!
In most cases the Clients will decide how to authenticate when joining Servers, the Server owners only really need to paste Public Keys into their Whitelist and be done with it, or if they run on a non-Whitelist Server they would need to check the other ways to make sure a person is valid, like with a server password or so.
If a Server Owner has to deal with really stupid people (or is too lazy to paste keys into a Whitelist), there is also the way of letting the host create a one-time-single-use-code for letting a person Login and then by logging in, the public Key would automatically add itself to the Whitelist.
It is really quite simple, you log into a Server once, and after that you have an infinite (or limited if the client wants to) session token somewhere on your Computer, USB Stick, Yubikey, Raspberry-Pi-Pico or whatever, that you can use to join said Server without any authentication prompts.
Edit: Oh right you mentioned IPs too, uhh dont know if you knew that but ISPs love IPv4 and they love it so much they create IPv4 Pools for their Customers to swim in, so they get as many different IPs as possible per day!