This specifies the method that your device may use to supply your username and password to the server for your PPP (Point-to-Point Protocol) connection. Available choices include PAP, CHAP (or Microsoft CHAP), either, or neither.
If you carrier does not require you to supply a username and password in your APN settings, this setting probably has no effect. For unknown reasons, many carriers tend to specify what you should put here anyway, even if they don't require a username or password.
Note that neither PAP nor CHAP are particularly secure protocols, and that carriers won't be relying on them for actual security purposes.