When does optimize storage decide to removing things locally and only keep them on iCloud?

The files that are moved to an "iCloud only" status are your files, so there is nothing that would be offloaded to iCloud that would be required for computer to function correctly.

The upload to iCloud is done dynamically, and we are not privy to the algorithm used to determine the criteria for offloading files.

Where have you turned on the Optimize Storage option? Did you turn on the one under System Preferences>iCloud>iCloud Drive>Options?

If you are running out of room as a result of other things running on your Mac (apps, games, etc.), then Optimize isn't going to help you. Only your files are offloaded when your are running low on space.

There is an additional Optimize option that you can also turn on that will remove the local copies of TV Show/Movies that you have already watched, and will offload all but your recent Attachments in your email account. You can turn this Optimize option on by going to >About This Mac>Storage>Manage, and selecting Optimize in the Recommendation List.

Best,

GB

a few things

the purpose of optimize storage is to reduce storage requirements on you Mac do it does with remove things or in the case of photos use reduced quality copies

if you only have 5 GB of free storage on your Mac you are at risk - you should always have a minimum of 10 GB free and 10% of you disk capacity is best

the Mc needs to be powered, awake and on WiFi for syncing and optimization to happen, is it?

LN

See some articles About storage on your device and in iCloud - Apple Support

Manage your iCloud storage - Apple Support