In its current form, I would agree that it's pretty limited and anomalous. I understand that turning on the toggle will reduce the amount of storage on the iOS device while retaining the full resolution copies on iCloud. But eventually, you're still going to fill up your device! And if deleting the photos on the phone also deletes them on iCloud, then how is that ever going to be manageable?
Google has recently licked this problem on Android by using their Google+ Photos app. On Android, the photos on your phone automatically upload to Google. When you are viewing your Auto Backup in the app on your phone and you delete a photo, it will also delete it from your photo (and it warns you). But you can also choose to ONLY delete the photos from your device and leave them on Google+ as a backup.
Sometimes, a user wants to conveniently delete a photo from the phone AND from the backup. Other times, you just want to free up space on your phone by deleting the local copy and leaving the server copy. There was a learning curve on Android as well (many questions like this were asked, and are still being asked), but it works great and they have basically licked the problem.
Apple has a slightly different philosophy: there's is more of a syncing solution than a backup solution. iCloud Photo Library will automatically backup your photos and then sync them across all of your devices that also are logged into your iCloud account and have iCloud Photo Library turned on. This is a nice feature, but they haven't fully addressed the other issue. YES, they have the option to only keep an optimized version on your phone, BUT eventually you'll still end up filling up your phone, right? And what if you just want to delete them off of your phone and leave them on iCloud? Well you can't if you have iCloud Photo Library turned on. If you turn iCloud Photo Library OFF, then you go back to the camera roll and manage things yourself... but then you lose other functionality.
I'm sure they'll eventually get it worked out, but it's definitely a BETA right now.