why is iCloud taking up 38GB of Photos on my MBP?

iCloud is a synchronization service, not offline storage. Selecting optimize photos keep the full-resolution items in iCloud and lower resolution versions on your computer should space become necessary.

You can use iCloud (or any other cloud service) to backup your Photos Library, but that's not what's meant by the "iCloud Photos" selection in Photos>Preferences. As the little blurb in Preferences says, iCloud Photos is a service that stores your pictures and synchronizes them across all your devices, iphones, macs, and iPads, and allows quick off-line viewing by keeping only lower resolution images on those devices if you choose.

However, if the Photos Library is in cloud storage, then Photos can not use it. The Library drive has to have a high-speed connection to the computer, not connected through a network or the internet. If you store pictures (not the Photos Library) in iCloud or on OneDrive then you can look at them with Finder or some other apps, but you can't use the Photos app with them. Photos is primarily an organization tool that also lets you see and edit pictures.

First optimise storage only moves the full size originals into icloud - thumbnails, previews and database all stay on the hard drive - this can be around 20% of your full library. Finally optimise may not remove some items in any case until the storage is needed.

Also that category shown includes not only the photos library, but all image files stored on your system drive, no matter where they are.