The use of App Specific Passwords isn’t unique to AOL. Other mail providers (such as Google Mail, Yahoo etc.) also use App Specific passwords to enhance account security.
When using the Mail Providers own App, the provider gains far more control over “trust” and authentication than is otherwise the case when accessing the account from other Mail clients.
The idea behind App specific passwords is sound from the perspective of account security...
Each Mail client requires that a unique Password be generated from within the users account (accessed from the Mail Providers administration portal). The generated Password is “complex” and intentionally different from the “real” account password. This separation serves a number of benefits. These include:
a) the ability to revoke/change a single client password - without denying access to all Mail clients.
b) reduces the likelihood of the main account password being compromised.
c) if an App Specific password is compromised, the credentials cannot be used to facilitate account takeover. In this instance, the App Specific password only grants access to send/receive email from a specific Mail client; this password cannot be used to gain access to the main account management portal.