I don’t have an immediate answer for you on encryption. I know most of the communication is encrypted in flight for AD, and on disk passwords are stored hashed unless the “use reversible encryption field is checked”. There are (in Microsoft terms) gMSAs (group-managed service accounts) but other than using one for ADFS (their oath provider), I have little knowledge of how it actually works on the inside.

AD also provides encryption key backup services for Bitlocker (MS full-partition encryption for NTFS) and the local account manager I mentioned, LAPS. Recovering those keys requires either a global admin account or specific permission delegation. On disk, I know MS has an encryption provider that works with the TPM, but I don’t have any data about whether that system is used (or where the decryptor is located) for these accounts types with recoverable credentials.

I did read a story recently about a cyber security firm working with an org who had gotten their way all the way down to domain admin, but needed a biometric unlocked Bitwarden to pop the final backup server to “own” the org. They indicated that there was native windows encryption going on, and managed to break in using a now-patched vulnerability in Bitwarden to recover a decryption key achievable by resetting the domain admin’s password and doing some windows magic. On my DC at home, all I know is it doesn’t need my password to reboot so there’s credentials recovery somewhere.

Directly to your question about short term use passwords: I’m not sure there’s a way to do it out of the box in MS AD without getting into some overcomplicated process. Accounts themselves can have per-OU password expiration policies that are nanosecond accurate (I know because I once accidentally set a password policy to 365 nanoseconds instead of a year), and you can even set whole account expiry (which would prevent the user from unlocking their expired password with a changed one). Theoretically, you could design/find a system that interacts with your domain to set, impound/encrypt, and manage the account and password expiration of a given set of users, but that would likely be add on software.