PhotoLogic wrote: … Selecting Optimize Mac Storage in Settings of the Photos app creates a smaller version of the original photo on the iPad, iPhone, and Mac when storage on the device gets low and keeps the most recent, full resolution, in the iCloud?
atulya16 was talking about an iPhone, and you've shown the iCloud Settings window for the Mac, but this is essentially correct. The difference is that with a Mac it's possible to make backup copies of the Library, either by copying the Library directly to an external drive or by using Time Machine to make incremental backups (or both, which is better.) But with "Optimize Mac Storage" turned on, those copies may not be backing up original files, but just smaller versions, so a backup isn't backing up at all. I keep my iPhone set to "Optimize," but I don't use "Optimize" on my Mac. On my Mac I choose "Download Originals."
Of course, for some, there may not be enough room. In that case, we use an external drive. Storing the Photos Library on a carefully Mac-formatted drive works great.
Move your Photos library to save space on your Mac - Apple Support
But on a MacBook, where an external drive is unplugged for mobility, a Photos Library may have problems. So we move some of our other files on an external drive so that we can have enough room on the internal drive to hold the Photos Library. We may even use multiple Libraries, and keep only a Favorites Library, which is connected to iCloud, on the internal drive