How do I connect a server service to Dynamics Online

I've found that to do this successfully, you'll need to setup all of the following:

1. Create an application registration in Azure AD:
   • grant it API permissions for Dynamics, specifically "Access Dynamics 365 as organization users"
   • give it a dummy web redirect URI such as http://localhost/auth
   • generate a client secret and save it for later
2. Create a user account in Azure AD and give it permissions to Dynamics.
3. Create an application user record in Dynamics with the same email as the non-interactive user account above.
4. Authenticate your application using the user account you've created.

For step 4, you'll want to open an new incognito window, construct a url using the following pattern and login using your user account credentials in step 2:

https://login.microsoftonline.com/<your aad tenant id>/oauth2/authorize?client_id=<client id>&response_type=code&redirect_uri=<redirect uri from step 1>&response_mode=query&resource=https://<organization name>.<region>.dynamics.com&state=<random value>

When this is done, you should see that your Dynamics application user has an Application ID and Application ID URI.

Now with your ClientId and ClientSecret, along with a few other organization specific variables, you can authenticate with Azure Active Directory (AAD) to acquire an oauth token and construct an OrganizationWebProxyClient. I've never found a complete code example of doing this, but I have developed the following for my own purposes. Note that the token you acquire has an expiry of 1 hr.

internal class ExampleClientProvider
{
    // Relevant nuget packages:
    // <package id="Microsoft.CrmSdk.CoreAssemblies" version="9.0.2.9" targetFramework="net472" />
    // <package id="Microsoft.IdentityModel.Clients.ActiveDirectory" version="4.5.1" targetFramework="net461" />

    // Relevant imports:
    // using Microsoft.IdentityModel.Clients.ActiveDirectory;
    // using Microsoft.Crm.Sdk.Messages;
    // using Microsoft.Xrm.Sdk;
    // using Microsoft.Xrm.Sdk.Client;
    // using Microsoft.Xrm.Sdk.WebServiceClient;

    private const string TenantId = "<your aad tenant id>";                 // from your app registration overview "Directory (tenant) ID"
    private const string ClientId = "<your client id>";                     // from your app registration overview "Application (client) ID"
    private const string ClientSecret = "<your client secret>";             // secret generated in step 1
    private const string LoginUrl = "https://login.microsoftonline.com";    // aad login url
    private const string OrganizationName = "<your organization name>";     // check your dynamics login url, e.g. https://<organization>.<region>.dynamics.com
    private const string OrganizationRegion = "<your organization region>"; // might be crm for north america, check your dynamics login url    

    private string GetServiceUrl()
    {
        return $"{GetResourceUrl()}/XRMServices/2011/Organization.svc/web";
    }

    private string GetResourceUrl()
    {
        return $"https://{OrganizationName}.api.{OrganizationRegion}.dynamics.com";
    }

    private string GetAuthorityUrl()
    {
        return $"{LoginUrl}/{TenantId}";
    }

    public async Task<OrganizationWebProxyClient> CreateClient()
    {
        var context = new AuthenticationContext(GetAuthorityUrl(), false);
        var token = await context.AcquireTokenAsync(GetResourceUrl(), new ClientCredential(ClientId, ClientSecret));

        return new OrganizationWebProxyClient(new Uri(GetServiceUrl()), true)
        {
            HeaderToken = token.AccessToken,
            SdkClientVersion = "9.1"
        };
    }

    public async Task<OrganizationServiceContext> CreateContext()
    {
        var client = await CreateClient();
        return new OrganizationServiceContext(client);
    }

    public async Task TestApiCall()
    {
        var context = await CreateContext();

        // send a test request to verify authentication is working
        var response = (WhoAmIResponse) context.Execute(new WhoAmIRequest());
    }
}

If I understand your question correctly, you want to connect to Dynamics 2016 (Dynamics 365) through a Registerd Azure Application with ClientId and Secret, instead of Username and Password. If this is correct, yes this is possible with the OrganizationWebProxyClient . You can even use strongly types assemblies.

var organizationWebProxyClient = new OrganizationWebProxyClient(GetServiceUrl(), true);
organizationWebProxyClient.HeaderToken = authToken.AccessToken;

OrganizationRequest request = new OrganizationRequest()
{
    RequestName = "WhoAmI"
};

WhoAmIResponse response = organizationWebProxyClient.Execute(new WhoAmIRequest()) as WhoAmIResponse;
Console.WriteLine(response.UserId);

Contact contact = new Contact();
contact.EMailAddress1 = "jennie.whiten@mycompany.com";
contact.FirstName = "Jennie";
contact.LastName = "White";
contact.Id = Guid.NewGuid();

organizationWebProxyClient.Create(contact);

To get the AccessToken, please refer to the following post Connect to Dynamics CRM WebApi from Console Application.

Replace line 66 (full source code)

authToken = await authContext.AcquireTokenAsync(resourceUrl, clientId, new Uri(redirectUrl), new PlatformParameters(PromptBehavior.Never));

with

authToken = await authContext.AcquireTokenAsync( resourceUrl, new ClientCredential(clientId, secret));

You can also check the following Link Authenticate Azure Function App to connect to Dynamics 365 CRM online that describes how to secure your credentials using the Azure Key Vault.