Settings & keep-time · Keep-time and retention
Why does the Recycle Vault have a size limit on my Mac?
Short answer: It stops removed files waiting for your external drive from filling your internal disk. If the limit is reached with no drive connected, new removals pause until you reconnect the drive.
So it can never fill your Mac's internal disk. Removed files normally rest on your external drive; when the drive isn't connected, they wait on your Mac until it comes back. The limit caps that waiting area.
If the limit is reached with no drive connected, Storage Studio pauses new removals rather than risk filling your disk, and asks you to connect the drive. Once you do, the waiting files move across automatically. You can raise or lower the limit in the vault's settings.