Can I use iCloud drive if my hard drive is smaller than my iCloud Drive account?

For example, if I have a 128 GB hard drive, can I use a 1 TB iCloud Drive? Can I limit how much space iCloud uses to sync files on my hard drive? If this sync space is filled, will the iCloud Drive client fail when I try to transfer new files to iCloud Drive, or will it remove something from the local cache to make this possible?

Thanks.