Warning: not an explanation why, but more a history and a few thoughts
Apple, in the name of user privacy, forced all Safari Extension to move to a Safari App Extension framework with Safari 13 (on macOS Catalina). This broke every single Safari Web Extension back in 2019, but gave Apple more power to enforce certain privacy and security measures.
While not a terrible idea on the surface, it meant that a great many Safari Extensions simply vanished with developers not wanting to invest the time and effort to maintain them and Apple eventually heard the community. With Safari 14 the decision was reversed and developers now have a command line tool to convert a Web Extension to a Safari App Extension.
They still end up as an app in your applications folder and the only good reason for that is that you have a single place to uninstalls apps from
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You mentioned it using up space and you have a point there - a web extension is mainly HTML, JavaScript and CSS and some JSON files and are rather tiny, while App Extensions can be significantly larger. However, if your extension is part of another app that you already use, it is a convenient delivery mechanisms that ensures that things that belong together are kept together.
As a developer it allows me to hook into a few APIs like iCloud that can be quite beneficial. I have a Safari App Extension (Open Access Helper
www.oahelper.org) that helps students and academics find open access copies of otherwise paywalled scientific articles. There's a version for iOS / iPadOS and macOS and all versions are free.
On iOS / iPadOS you can "bookmark" an article and then, if you'd like, the App Extension can show you those bookmarks. I could easily have done this through something like Firebase or any number of others tools, but there is one really beautiful aspect of this: I don't get to see ANY of the data and thus don't have to worry about it.
The data is stored within Apple's system, in an area, that I, as a developer, cannot peek into and that gives the user the confidence to bookmark and me the confidence to offer the feature, without the legal headaches.
For the consumer it means that there is a single place to get those extensions, a single place on how to see them update and if I pay for them, there is a single way to do that, and if there ever was a malicious extension, Apple has a single pathway of stopping it from running.
Having said all that, I think Apple could have made different decisions, so that there would be a thriving market place rather than one that kind of limps along.