Yes, iCloud Drive behaves in much the same way that Dropbox does: the content 
of your repository is synchronised to a copy stored locally.

Unfortunately, my best Google foo cannot actually answer the question of what 
happens when either your local disk or iCloud storage space run out.  One might 
hope, and assume, that you can still access data in iCloud Drive even if it 
isn’t stored locally, and that local changes that aren’t made simply fail to 
propagate.  But there doesn’t appear to be any kind of indication of when this 
happens, or what you will get when it does.

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