Photo Stream was not a pointer, as you discovered. The photos are synced and stored on the local device. The new method seems more efficient, as it does not duplicate the images taken on the device, but leaves them alone and only syncs images from other devices.
It's hard to say if Photo Stream reduced a particular photo using the method you suggested. It does reduce images if they are really big; usually panoramic or imported photos. Photos taken on your device are not usually reduced. At least not in my experience.
You have to keep an eye on Mail when sending photos. It can automatically reduce a photos size.
Eventually what Apple wants to do is keep only your most recent photos on the device at full size, with the older ones only loading at full size when you need them. I'm already seeing this in my Shared iCloud Photos albums. For some people and purposes this is going to be great. For those that want full sized non internet dependent albums, well, they are probably going to use third party photo managers; just like they do now when the Photos app isn't what they want.
The increased iCloud storage space dependence is probably whey the've reduced the price of extra storage, across the board. The extra 20GB plan I used to pay $40 for is now only 99 cents a month. You can get 200 GB for $3.99/mo. Not the best cloud storage options on the market, but not bad either.
But, really, we don't know what is going to happen with iCloud and Photos. At least not the details. Apple has said they are changing things, and there have been some leaks from the beta Yosemite users, but the full picture (pun intended) is not in place.
