I'm pretty sure that iCloud stores the full version and downloads a lower quality optimised version to your phone.
If you open iPhone settings and browse to:
> Apple ID > iCloud > Photos
There is an option to 'Optimise iPhone Storage' which is enabled by default. This states:
> If your phone is low on space, full resolution photos and videos are automatically replaced with smaller device sized versions. Full-Resolution versions can be downloaded from iCloud at any time.
If you open iPhone settings and browse to:
There is an option to 'Optimise iPhone Storage' which is enabled by default. This states: This seems perfectly reasonable to me.