How to add a user without knowing the encrypted form of the password?

You can use openssl to generate pre encrypted password strings to use with the -p option to useradd

echo "P4sSw0rD" | openssl passwd -1 -stdin

$1$Jxmpx1Da$Y8MzBctIyDW8/7pFPbNWD1

The -1 says to generate a MD5 password hash. The salt is automatically generated.

You can then use

useradd -d /home/dummy -g idiots -m -p $(echo "P4sSw0rD" | openssl passwd -1 -stdin) dummy

to add the user. To do this interactively hiding the password

useradd -d /home/dummy -g idiots -m -p $(read -sp Password: pw ; echo $pw | openssl passwd -1 -stdin) dummy

Apparently, you can use

echo "password" | passwd dummy --stdin

I've never tried this.

Alternatively, you could put the user's public key in /home/dummy/.ssh/authorized_keys and forget about passwords entirely. This is the best option security-wise.