They're the size of a paper towel.

Tie it on outside of backpack to dry? Never used these specifically just spitballing based on experience.

Usually you'd have a bag for garbage that you can put it in. It mainly saves space to start with in your pack. You have other supplies like food and water which will be used up over the course of the hike, providing more space on the way back that wouldn't be there at the start, so the towels expanding after use isn't as much of a problem.