This Support Article is the closest thing to what you’re asking for. However likely will not answer all your questions because of the many variables you’re considering.
I’ll try to break down the most important factors:
• You case is slightly simpler because you’re using Windows so there’s no duplicate Apple Photos libraries being created by iCloud (UNLESS you have multiple iphones/ipads on the same Apple account)
• iCloud Photos on your phone attempts to intelligently move your originals to the cloud and keep more local storage on your device free. It does this more aggressively as your available local storage diminishes.
• Mylio (nor any other third-party app) can access files directly on iCloud. So YES you have to turn on the “download originals” option on your iPhone so the photos remain locally available - otherwise Mylio can’t sync them.
• If you do have multiple devices sharing an iCloud account, they can all be on your Mylio account, but only one fo them need to import its camera roll to Mylio. For example, you have an iPhone and a iPad on the same iCloud account. You take photos with both, and both are synchronized by iCloud Photos - meaning photos you take on the iPad appear on the iPhone and vice-versa. In that scenario, Mylio can be installed on both devices, but only one of them (say the iPhone) should be automatically importing photos to Mylio (Settings → Import).
• In the scenario above, only the iPhone would need to “Download all Photos” from iCloud and it could also be set for Mylio to “Free up space” after a photo has been saved to a vault. So your sync would look like this:
— New photo on iPhone or iPad gets sync to iCloud.
— iPhone Downloads new photo locally
— Photo gets synced to Mylio from the iPhone
— Original version of the photo is now in Vault - Mylio removes the file from the iPhone camera roll. File gets deleted on both iCloud and iPad
— Optimized version of the file is still available in both devices inside Mylio app (and original is still protected in Vault)
Hope that make sense, do let me know if you need further info or help
It seems this could be a good subject for a Webinar where we discuss all the possible interactions between Apple Photos/iCloud Photos and their ramifications.