Desktop has disappeared as an option in my Finder Favorites sidebar

Well, Desktop is already in your Sidebar, just in the iCloud section...

But try this:

1) click on iCoud Drive. You see Desktop there, right?

2) Drag this Desktop to your Sidebar

Does it work?

In Finder->Preferences->Sidebar, is Desktop checked?

With Desktop & Documents in iCloud Drive enabled, Desktop and Documents shows up under iCloud Drive.

While you can drag the Desktop and Documents to Favorites, they often do not work correctly from there.

You can drag them from iCloud Drive into Favorites, but I wouldn't do that as it helps to have another place to go when the ones in Favorites stop working.

Select one from iCloud Drive, click on the folder name in the title bar to show the folder icon, then click+hold folder, then drag into Favorites.

There is nothing inherently wrong with having "Documents and Desktop in iCloud". It is a personal choice.

You just need to be aware of it. As it is, your Desktop folder, and your Documents folder, are in iCloud.

This means that files you put there will be uploaded to iCloud, and may or may not have a physical local copy, depending also on other settings, like "Optimize Mac Storage".

This can be extremely useful, or a nuisance. If one has a mac with only 128GB of storage, and a large iCloud allotment, it may be the way to keep everything.

If one has, say a 1TB mac, and only 5GB of free iCloud space, then there may not be enough space to keep your Documents and Desktop folders in iCloud.

Also, it seems that you have activated Documents and Desktop in iCloud.

That small container 500MB is not a big problem, the 70+GB of "free space" that the OP can't recover is.