they basically built up areas that were low-lying but just above the water and dredged the bits between, usually to about 6 feet. Buildings then rest on wooden poles sunk into the ground that have hardened till they're more or less stone, and have actual stone platforms placed on top of them There are plenty of pavements and little bridges everywhere, so it's easily walkable and not very big. The islands are fixed, they don't float. You can hop around in the little vaporetti (water ferries), I believe the only public transport in Europe that costs more than London's.
The population keeps shrinking because the large number of tourists push the prices up. Lots go and live in Mestre, on the shores of the lagoon - there's a railway line across from there to Venice itself. It doesn't blend into the mainland though. People first moved there centuries ago because, surrounded by water, it was easy to defend. But the huge cruise ships coming there ever day are churning up the water badly. They keep talking about closing off the lagoon (it has three entrances) with something like the Thames Barrier to control water levels but they haven't actually done anything.
Can't say I've ever noticed a smell.
It's about 250,000, the same as Wolverhampton.