A Microsoft file hosting and synchronization service.
I don't have the Files On-Demand ON/OFF switch either. I don't believe your OneDrive is the latest version.
I think freeing up space on all but one device is a good approach. Even better is to have files freed up everywhere, then you will only have one version.
An outdated file sitting in OneDrive waiting to sync serves no purpose. To work on the file, updates must be downloaded from the cloud, so the entire file might as well be an On-Demand cloud file. Backup files are labeled as such and are in a different folder to avoid sync conflicts.
You appear to be putting forward a workaround which involves downloading the file every time from the cloud IF it's available.
However, the syncing process is not always working correctly as has been repeatedly pointed out in this thread. It should not be replacing new versions of files with old versions and restoring deleted files when a device that has not been used for a while is booted up with cloud access.
Please look at the screenshots shown above of the Files On Demand dialog box which seems to cause these problems when it does not have the same setting across all devices.