Hey Tom,
Congrats on the new XS! I just got an XR and am still poking around getting to know it.
On the general subject of moving photos around between devices, you might take a look at this: Transfer photos and videos from your iPhone, iPad, or iPod touch - Apple Support . Despite the title, there's a section toward the bottom that deals with transferring photos in the other direction, from the Mac to your phone.
Can you use your photos as wallpaper? Yes — in Settings > Wallpaper, tap on Choose a New Wallpaper, and you'll be taken to a view of your Photos library, in addition to the available built-in choices.
The difference between iCloud Drive and iCloud Photos ... I think of these as different parts of the same larger system, in that they both depend on the cloud storage space that you've got available in iCloud. In brief, iCloud Photos is like a photo library in the cloud that you can sync to all your devices, so that all your photos (and albums, etc) will be available everywhere. iCloud Drive is a more like a virtual hard drive, a general-purpose storage-and-sharing system that can include a whole lot of stuff, including regular files and folders from your Mac, your Desktop, and pretty much anything. There's a lot of detail to absorb about these things, so here is some additional reading:
Set up iCloud on your iPhone, iPad, or iPod touch - Apple Support
Set up iCloud Drive - Apple Support
Set up and use iCloud Photos - Apple Support
Cheers mate!