Optimizing, storage setting confusion for Catalina

1. You can sync all of your photos to iCloud by turning on iCloud Photos on each device (you mention "all devices" but don't indicate what they are). Any device where you turn on iCloud Photos will sync to iCloud and to all other devices where that option is turned on. The option to optimize is also separate for each device. You can have some devices optimize and not others. But you cannot force all images to be space-saving versions on each device -- i.e., optimization automatically determines how many (if any) photos to optimize on each device depending on the space available. On an iPhone or iPad, the choices are at Settings > [username] > iCloud > Photos > iCloud Photos and Optimize iPhone Storage. On a Mac, open the Photos app, go to Photos Preferences, click iCloud at the top of the Preferences window and turn on iCloud Photos and Optimize Mac Storage. (there is also a preference at Apple menu > System Preferences > Apple ID > iCloud > Photos but there is no Optimize photos option there so you may as well turn both options on in Photos Preferences). More information in: Set up and use iCloud Photos - Apple Support
2. Documents have their own settings including a separate choice regarding optimization. You can for example optimize photos but not documents or vice versa. To sync documents, turn on Apple menu > System Preferences > Apple ID > iCloud > iCloud Drive and iCloud Drive Options - Desktop & Documents. By default, iCloud Drive keeps a local copy of all documents on your Mac's storage. If you want it to possibly not keep a local copy of some or all documents, see the "Store your files in iCloud and save space on your device" section of Add your Desktop and Documents files to iCloud Drive - Apple Support and note that you cannot force it to never have a local copy -- it decides automatically based on space available on your Mac. Also note that the setting for optimizing iCloud Drive is a different setting than for optimizing iCloud Photos and that it is in a different place -- it is at Apple menu > System Preferences > Apple ID > iCloud > Optimize Mac Storage (just below the bottom of the window on the right of that System Preference.
3. There is no option to do all of that. However, any application data on a Mac that you save to the iCloud Drive folder (or to Desktop & Documents if that option is on) will sync to iCloud. Preferences do not and neither does anything other than Photos or things saved to iCloud Drive and Desktop & Documents. On an iPhone and iPad there is the option to do an iCloud Backup and that does include that type of data.

re: Did I get close to understanding? -- yes

re: Also, why are audiobooks & music not synced? I make my own, ...

Purchased audiobooks and music can be downloaded again but obviously not that you have made yourself. That is not an area i have experience in but if you are syncing Desktop & Documents, you could create audiobooks and music folders inside the Documents folder and they would sync.

re: ... so I must keep backups.

Apple offers iCloud Backup for iPhones and iPads but not for Mac computers.

It is possible to sync data from a Mac to iCloud if you turn on those options (e.g., iCloud Photos, iCloud Drive including the Desktop & Documents option). Syncing has some of the benefits of a backup (and the benefit of being offsite) but is not the same as a backup. Major differences include the fact that not everything on your Mac can be synced and the fact that if you delete something, accidentally or otherwise, there is only a limited time period (30 days in most cases) during which it can be recovered. Personally, I would not rely solely on iCloud for a backup.

Just in case -- be aware that data that is optimized (on iCloud with no local copy on your Mac) cannot be backed up to an external drive.