Generally, when you create a subdomain, it is merely an alias to a path on the server with the same name. For example, the address subdomain.mydomain.com will usually map directly to a directory at mydomain.com/subdomain. So when you use subdomains, you're really using a path, but accessing it via an alias. Also, subdomains can usually have their own email addresses that can be configured separately from the main domain, so user@domain.com will be a different address than user@subdomain.domain.com.

I would not bother with subdomains for every user since this will increase the overhead of your server. You will need DNS records for every subdomain and the subdomains will not be accessible until the DNS records update across the internet, just like if you were setting up a completely new domain. Due to the increase in server overhead, you should probably just give all your users a directory and not a subdomain.

Hope that helps.