In OneLogin, a user's directory controls where the user "lives" and where the user's password is validated when the user signs into OneLogin. For example, OneLogin can authenticate users against your Active Directory behind the firewall. When you manually create a user in OneLogin, that user will be authenticated by OneLogin.
In this case, the user's Authenticated by setting will say OneLogin. If the user was imported from Active Directory, Authenticated by would be the name of that directory.
When to use OneLogin as the directory
Many companies that exclusively use cloud applications don't need to have a directory behind the firewall. In this case, OneLogin can provide most of the functions a directory would normally provide: user management, authentication, password management, VPN integration etc.
If you need to provide single sign-on or VPN access for a group of users that are not employees, e.g. customers or partners, you can also benefit from using OneLogin as your directory.