What is the point of iCloud?!

My phone storage is full (256gb). I had 200gb of iCloud storage but it was only using 40gb. Apple told me this was because I needed more iCloud capacity than the phone data for it to back up and I would have to increase to 2TB. This would allow it to back everything up and I would then have space on my phone to download the latest iOS and just generally free up space.

However I don’t have any more free storage on my phone and reading other threads its repeated that iCloud doesn’t “free up space” on your phone. If it doesn’t then what is the point? Ok so it could purely be a separate back up, but in that case nobody would ever need 2 tb because you can’t get a phone with 2 tb of storage.

It’s infuriating, if iCloud is a separate bank of memory why can’t things be saved here and not on your phone?