If I have all my pictures stored on the iCloud, why are they taking up so much room on my phone? I thought the iCloud was designed to free up storage on your actual device?
Even when your photos are stored in iCloud, the Photo app will still have a low resolution version of the image on the iPhone so that you can see what photos you have in the cloud. These images are quite small, but will still consume space on your iPhone. If you have selected 'optimise iPhone storage' the app will try to intelligently select photos the be available on your phone (possibly recent pictures, maybe ones you have looked at several times etc). All these things will take some space ... but it will be a fraction of the space all of the full resolution pictures would take.
The process for optimizing space is a black box and don't expect it to conform to your expectations and desires. It's going to try to use as much space on your phone as it views as prudent before it starts replacing the original photos with the low-res versions.
One action you can take is to turn-off iCloud Photo Library on your phone and let it delete everything (it takes time so be patient) and then turn it back on. That will re-download all the low-res versions. That will give you a starting point of all low-res photos but eventually you'll be back in the same spot as you take new photos with your iPhone. I've done it and it does work but I've got multiple backups and it was still scary.
Go to iCloud settings and then go from optimize storage to download and keep originals keep the ones you want and disable photos on iCloud and the manage iCloud and storage .