You don't say what macOS you are using, so I need to ask: you mention that your Photos Library is on an external drive. Is that drive formatted in either APFS format or Mac OS Extended (Journaled) format? If this drive is in a an incompatible format, stop running Photos with it immediately! A Photos Library can sit on an incompatible drive, but running it may corrupt the database.
iCloud is a synchronization service. When you engage iCloud Photos, for instance, then the Library on that device is kept exactly the same as the iCloud Photos Library. So, for instance, if you take a picture with your iPhone, it is added to the iPhone's Photos Library, copied to iCloud Photos Library at iCloud.com, and then copied to the Photos Library on each of the other devices that you have connected. If you delete a picture on your Mac, then that picture is deleted at iCloud and on all the other devices.
I'm not sure why your Library decreased in size. Sometimes those numbers don't accurately reflect what's really going on, and they are often out of step. If you had "Optimize" checked in Photos' Settings>iCloud, then you would expect fluctuation but, like you, I have Download checked, and my Library Size doesn't vary much, and it certainly doesn't drop. Of course, if someone else is connected to the same iCloud account, then they might delete some pictures that you didn't expect.
Your Library should have exactly the same pictures as the Library at iCloud.com. Have you looked there to see what's happening? Do you have at least 10% free space at iCloud? Do you have at least 10% free space on your Mac?
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