Local storage size & iCloud?

Hi Communities,

I have 2tb of storage on my iCloud account via an old iMac about to be replaced.

If I replace this with a new laptop or Mac mini with a smaller amount of local storage, how does this work with all my files? I'm assuming they will only downloaded as needed? (as per photos on my iPhone). What about making changes to files? What if I'm working offline. how/when do files sync?

Any help appreciated thanks.