MacBook Air M1 runs out of Memory

This suggests a memory leak. Have you changed the mouse pointer size or colour in System Preferences -> Accessibility -> Display -> Pointer, if so, set the size back to normal and reset the colour. This was a bug in earlier versions of Monterey which appeared to have been fixed but it is worth a try.

There are 2 reasons for the "Your system has run out of application memory" dialog box.

A) Your boot disk has very low free storage, and macOS cannot create page/swap files to offload virtual memory contents to disk. This is generally not the case, but I mention because if you do have very low free storage, it might apply. Depending on how much virtual memory is being called for, anything under 50-100GB free may trigger the message.

B) A process (or set of processes) have asked macOS for excessive amounts of virtual memory address space. Virtual memory address space requires macOS to create Virtual Memory Page Tables in the kernel address space to keep track of the application virtual addresses given out. Generally, if there is a memory leak (process asks for a virtual address range, uses the addresses, forgets to give them back, asks for another virtual address range, uses the addresses, wash, rinse, repeat), eventually there are so many virtual memory page table entries trying to keep track of the virtual addresses, that macOS no longer has memory available for applications, and you get the "Your system has run out of application memory"

If you look at Applications -> Utilties -> Activity Monitor -> View (menu) -> All Processes -> Memory (tab), you can see what processes are using lots of memory.

Can the MacBook Air M1(8Gb Memory) even handle Graphics editing like DaVinci Resolve fusion??

It will use 50+GB of disk space to page out virtual memory to disk. In theory it can handle applications that wants lots of memory, but there are limits.

Free disks space for page and swap files.

Sufficient real RAM so that operating system page tables (1 page table entry for every 4K of virtual memory used by the application; about 14,500,000 page table entries for your 58GB DaVinci app). That many page table entries in kernel address space eventually adds up to real memory. Keep in mind that all the other processes running on the system also have virtual memory page tables in memory, so when you add them all up, you start to need a lot of memory just for page table entries.

I know enough that DiVinci is related to images, but I know nothing more about it. If you have asked it to put a lot of large format image data into memory, that is one way to punch up the amount of virtual memory being used.

It could be, is there a Davinci user group to post the same question?