iCloud Drive is a folder on your Mac. If you see Documents there, then you are seeing the Documents folder on your Mac. Including Documents in syncing with iCloud just puts the Documents folder in the iCloud Drive folder instead of in your User folder. Otherwise, it's the same.
Things in your iCloud Drive are copied to iCloud.com where you can see them and use them from the browser. If you have other devices connected to iCloud, then the contents of iCloud Drive can be seen and used on those other machines, as well. But, the Documents folder is local to you. This applies to anything you put in the iCloud Drive folder.
If you have "Optimize Mac Storage" turned on, then when your Mac's hard drive gets really full, some lesser used files will be removed to make room. When you need one of those removed files, the Mac will grab the copy at iCloud.com and copy it to your Mac where it will again become a local file. You always use local files. This should all happen transparently. Perhaps the biggest downside of "Optimize" is that backups may not include all your files. I don't do "Optimize" on my Mac, though I use it on my iPhone which has way less storage. To keep the room I need on my MacBook, I put stuff on a tiny (like 1 ounce) SSD that I carry around. I try to keep 20% of my internal drive free.
Does this make more sense about iCloud Drive?
