Using Azure Service Principal Authentication
The authentication as an Azure Service Principal is handled via the OAuth Client Credentials flow, and it does not involve direct user authentication. Instead, credentials are created for just the app itself. All tasks taken by the app are done without a default user context, but based on the assigned roles. The application access to the resources is controlled through the assigned roles' permissions.
You will need to register an OAuth app to obtain the OAuth property values before connection to the Dynamics 365 data source. You can check the Custom Credentials guide on how to set the OAuth properties.
Creating a Custom OAuth App
See Creating a Custom OAuth App for a procedure.