The ‘Files On-Demand’ setting for OneDrive helps you access all the files in your cloud storage in OneDrive without having to download them and use up storage space on your computer.
When you turn on ‘Files On-Demand’ you still see all your files and folders in File Explorer, but they won't take up space. When you’re connected to the internet, you’ll be able to use the files like every other file on your device.
You can also select specific files and folders to be always available, even if you're offline. OneDrive will download them and these will take up space on your PC.
A blue cloud icon next to a OneDrive file or folder indicates that the file is only available online. These files don’t take up space on your computer. You see a cloud icon for each online-only file in File Explorer, but the file doesn’t download to your device until you open it. You can’t open online-only files when your device isn’t connected to the Internet.
When you open an online-only file, it downloads to your device and becomes a locally available file. You can open a locally available file anytime, even without Internet access. If you need more space, you can change the file back to online only.
Only files that you mark as "Always keep on this device" have the green circle with the white check mark. These always available files download to your device and take up space, but they’re always there for you even when you’re offline.