I am modifying a mini cooler/heater and there is one component whose role I don't understand. The Peltier cell is attached to a heat sink on one side and is in contact with a metallic block on the other side. On top of this metallic block there is a black plastic cylinder with two incoming wires. The two wires are set at 0 V both when cooling and when heating. What does this unknown component do? Thank you.
My guess is that the device is a thermal limit switch. The device opens the circuit up once a temperature level has been reached. The main purpose of it is to ensure safety and prevent a possible fire. The photo below is a thermal limit switch commonly found in your furnace
What you are looking at is a temperature switch like this.
More likely it's a thermistor, a resistor that changes resistance with temperature. That's why you are seeing the voltage change. So if the voltage is decreasing when heating, the resistance is RISING with temperature, so it is a PTC (Positive Temperature Coefficient of resistance) thermistor. You said it was feeding an LED, so likely the other side of that LED circuit was powered when heating, so the resistance dropped between the LED and ground as it reaches it's design temperature and the LED gets less voltage and thus goes dimmer as it heats.