You’re on the right track with creating the plugin. All your assumptions are correct.
To avoid errors on activation you’ll want to wrap the functions that you are redefining in function_exists
blocks, as on activation those functions will already be defined:
if ( ! function_exists( 'wp_hash_password' ) ) :
function wp_hash_password( $password ) {
return 'foo';
}
endif;
Put your code in wp-content/plugins/myfirstplugin/myplugin.php
make sure the plugin has the file headers so WordPress knows it is a plugin. There is also some helpful information for this on the Writing a plugin page under the heading Standard Plugin information
Then as you already assumed you activate your plugin on the plugins page in the WordPress admin.