I just upgrade to 2.2 firmware and I could see my System Storage in Cydia. It says I have 500mb, but 85.7% is already used. I didn't even install any apps after I restored my iPhone and then upgraded it.

I did notice Cydia came with a lot of Apps installed. Such as, adv-cmds, APT, Base Structure etc. there's A LOT more.. I"m assuming you can't delete those??

So then is it normal for my System Storage to have 85.7% of space Used p?? Now I only have 14.3% left.. is that how much everybody else starts with? Is it necessary to free up more space? If so how can I do that?

my used portion is about 77.1 percent ....
did you install any bit themes to your iphone......cause i feel they takeup a lot of the storage space on the system partition.....

if you want to try and fix this i thing a RESTORE in itunes will do the trick, as i personally dont feel very comfortable with the UPDATE option...

ps : it is adviced for you to setup you iphone as a new phone in itunes if you updated from a 1.1.x fw....as restoring to a backup leaves u with the old preferences file ...

hope this was helpful
good luck..