The M1 Mac mini default storage is 256GB on the base model and 512GB on the other and both are upgradable at the time of purchase up to 1TB / 2TB.
Best practice would be to boot from the internal 256GB drive and redirect your excess data to the external SSD. The internal SSD performance is high because the SSD chips are directly connected to the SoC and it interfaces at a very low hardware level. The SoC disk controller is extremely efficient. It also handles the disk encryption.
Sudden slow performance might be coincidental, foreshadowing the future failure of the external USB SSD. Depending on the brand of your USB 3.1 2TB SSD see if the manufacturer has a diagnostic tool to test the SSD. Depending on the quality of the external SSD flash memory chips and if the drive was over provisioned or not. An external USB SSD might not last as long as an internal one. There is a very wide range of lifespans with SSDs. Enterprise class SSD's are heavily over provisioned as they are going into RAID systems and being pushed hard 24/7. Enterprise SSD's are therefore very expensive. Normal retail SSD's in such a configuration would wear out in a few months. I doubt an external SSD is designed to be the primary disk on a continuous basis and may not be as robust as the internal SSD. Over the last decade, I've witnessed SSD's become a great deal more reliable than HDD's but external SSDs not so much. One reason the cost of the Apple internal SSD is that resiliency and over-provisioning. Apple doesn't publish the details but it's extremely rare for one of their new generation SSD's to have a hardware failure. It's more likely for the display in a MacBook Pro go bad.
Highly recommend that you boot off the internal SSD and put data mostly at rest on the external SSD to preserve its lifespan and to account for the slower performance on reads / writes. As well as the limited number of writes per block an external SSD may support. The boot drive will be writing far more frequently and its the number of writes to the same sectors / blocks that wear out flash memory.
It could also be a bug in macOS and I would bet there are very few users booting M1 Mac's off external disks. There is a version 13.1 coming soon it's on the 4th beta release.
used to be far more common especially in the age of internal HDD's and especially the Fusion drives in iMacs where they would fail and as they were not easily user serviceable the users would boot off an external disk until they could either get the iMac repaired or replaced.
One gotcha is if the internal SSD ever does fail, then you won't be able to boot from external media. There are some special hidden partitions on the internal SSD of M1 Mac's that are required to boot even when booting from USB / Thunderbolt.
If the internal storage really is not enough then you have the option to trade in the M1 Mac mini towards the purchase price of a new Mac. Or sell it privately. Perhaps a more loaded M1 Mac mini or an entry level Studio will fit your needs.
Typical usage pattern would be the OS and Apps are installed on the internal disk and you archive data to the external drive. However, you should have a backup plan for the external drive where you clone it to another disk, etc. A slower HDD drive may suffice as you are merely copying the data for the purposes of disaster recovery. Carbon Copy Cloner is an excellent tool and can take advantage of APFS and snapshots.
