Inside the new Files On-Demand Experience on macOS

Emanuele_Barone Thanks for the assistance! Unfortunately, everything is still very weird. I first started down this path when OneDrive was switched to CloudStorage after an auto-update via the App Store - I noticed that my OneDrive folder on one of my Macs had changed to a shortcut/alias, and started digging to figure out why. I eventually found my way here, read the explanations, and thought I had everything working properly on all four Macs in the house, but I really wanted to move my OneDrive location to one of my external drives on the home server, since the Mac in question only has 128GB internal.

So, I uninstalled OneDrive and reinstalled in order to get to the point where OneDrive would let me create the folder on the external, and let it download all of my files using the "right-click in the OneDrive folder" method. Everything looked good at that point, and ran fine for a few days, up until I restarted and it "couldn't find" the folder any more.

I ended up telling OneDrive to put everything in my user folder (where it created the "old style" OneDrive folder, not the new alias version), since it wouldn't let me put it on an external. When I clicked on the menu bar icon today, it did mention the Finder extension, so I enabled that, but then I also got the "you have to upgrade your storage to APFS" message after that (the external that I put the folder on last week is a softRAID-controlled HFS+ volume), even though the folder was on my APFS-formatted internal drive at this point.

After I read your message, I uninstalled OneDrive again, went back to the App Store to discover a new version came out yesterday, and downloaded it.  During setup, I tried to put the folder on another external drive - this one an APFS-formatted SSD that has never had the OneDrive folder on it - and was again told "you can't put the folder there", with the message that the folder can't be on a removable drive, which directly contradicts what Microsoft has been saying here.