iCloud & iCloud Photos · iCloud Drive basics
Where are iCloud Drive files stored on my Mac?
Short answer: Downloaded iCloud Drive files live on your Mac's startup disk, in your user Library, shown as iCloud Drive in Finder's sidebar. They count against internal storage, which is why making them online-only frees space.
Downloaded iCloud Drive files are stored on your Mac's startup disk, inside your user account's Library folder, and macOS shows them to you as iCloud Drive in Finder's sidebar. Always open them through that sidebar entry rather than digging through the Library folder.
Because the folder lives on your startup disk, downloaded iCloud files count against your internal storage. That's why making them online-only frees real space, and why macOS's Optimize Mac Storage setting exists.
macOS doesn't offer a supported way to put the iCloud Drive folder on an external drive. If you want big files off your internal disk, the safer options are making iCloud files online-only, or keeping non-synced folders on an external drive with Storage Studio. See can I move iCloud Drive to an external drive.