This scenario was created to be used with Pass-through Authentication or password hash synchronization. It is an alternative to the AD FS scenario because it provides the user with the seamless login experience when connected to the on-premises network with a domain joined machine.

The following figure shows how the user interacts with the network to consume Office 365 services:

The following figure shows how the request flows when using this scenario to access any application:

You can read more about this scenario at https://docs.microsoft.com/en-us/azure/active-directory/connect/active-directory-aadconnect-sso.