In the most secure configuration of digest auth, the server stores MD5(username:realm:password), and to authenticate, the server sends server_nonce, and the client sends back client_nonce and MD5(MD5(username:realm:password):server_nonce:client_nonce). The nonces are used to avoid a replay attack. The server MD5s its stored hash with server_nonce:client_nonce and checks if it matches against what the client sent.
But if those stored hashes get leaked, an attacker can use them to authenticate. You're in a better position than storing plaintext passwords, because the underlying cleartext probably won't be leaked (they're hashed with MD5, so it's not certain), so your users' credentials can't be used in future credential stuffing attacks, etc. But the attacker still has their credentials on your site.
In the other configurations of digest auth, the server ends up storing plaintext passwords (or reversably-encrypted passwords, which is just as bad).
See also https://en.wikipedia.org/wiki/Digest_access_authentication#D...
Using HTTPS + Basic Auth is far more secure, and (arguably) easier at this point.