Authentication

For that kind of hash value you should select "Crypt one-way string hashing" for Password format.

I've tried this on my Moodle 3.6 site: I have another database with "$2y$10$wtUJttanMpQw611t55GvfO8yUEwpD/4l.ihBwwxLnj5UksTXfaHJq" in the password column for the user and I am able to log in with the password "test".

Apart from the hash setting I've used the defaults in the plugin settings, the external database is MariaDB, so I'm using "mysqli" too.

If this still doesn't work, maybe tell us more about your environment, e.g. operating system, PHP exact version, database exact version. If the external database is on a different server give those details too. Also give the exact message you get when the login attempt fails.

If you're comfortable working with the code you could sanity check your PHP environment on the Moodle server with a test script:

<?php
$hash = '$2y$10$wtUJttanMpQw611t55GvfO8yUEwpD/4l.ihBwwxLnj5UksTXfaHJq';
$passwd = 'test';

if (password_verify($passwd, $hash)) {
    echo "Password OK" . PHP_EOL;
} else {
    echo "Password mismatch" . PHP_EOL;
}

E.g. save this as password_verify.php and run it with php password_verify.php.