It use the readline library,
which permit, in interactive mode, to recall commands, completions, etc..
You can use it in a console (useful for DXR3/HW+ owners, using TV output),
or in a X11 terminal window.
If you're a developper, and you want to test/debug your own plugins,
using toxine is useful due of script usage. This way, you can reproduce
actions without interactions, redirect outputs to a file (name given or
not). You can also see how to implement your own xine library frontend,
because toxine implement almost all xine's API calls.
If you don't like GUIs, or love console (and AAlib video output), toxine
is for you ;-)