They’re different features - if you ID or comment on an observation, you’re automatically now “following” it and will get notifications of new comments and certain types of IDs depending on your account settings. You can also choose to follow an observation you haven’t yet interacted with (with that button). Like you say, faving is for when you liked something about the observation. Observations with a lot of favorites are surfaced higher in certain places throughout the website (taxon page photo browser, stats page on collection projects, you can sort by # of faves). Some people use the favorites feature as a way to bookmark observations, but it wasn’t designed for that.
some relevant discussions: