One of the new features in macOS 10.12 Sierra is called Optimized Storage for iCloud Drive, a.k.a. iCloud Desktop and Documents. When enabled this feature automatically moves files stored on your Mac into iCloud to save space on your drive.
I highly recommend that this feature NOT be used at this time. In my opinion it is largely a marketing tactic by Apple to get users to pay for more iCloud storage (you only get 5GB free), plus it can lead to user frustration and even data loss.
While completely optional, if you are signed into iCloud at some point Sierra will politely prompt you to “Enable iCloud Desktop and Documents” with a description of “Store all your files from your Desktop and Documents folder in iCloud Drive. When storage is low only recently opened files are stored on this Mac. When you have enough storage all of your files will be stored on this Mac”.
You can also manually enable iCloud Desktop and Documents by clicking on the Apple, then going to About this Mac->Storage->Store in iCloud.
Behind the scenes this feature creates symbolic links in your home folder, moving the actual contents of the Desktop and Documents folder to hidden locations, and supposedly files are only removed from the Mac when the drive is filling up. This sounds good in theory if you are paying for plenty of iCloud storage, however there a growing number of complaints in the Apple discussion boards about recently created files being removed locally even when there is plenty of free space, making them unavailable unless the Mac has an internet connection.
Creative apps like InDesign and Illustrator also do not get along with this feature, as it causes broken links with placed files because data in the Desktop and Documents folders is actually located elsewhere. Apple has posted an article on this issue stating that “pro apps” may have problems with Optimized Storage for iCloud Drive, and to avoid this your project files should be saved someplace other than Desktop or Documents.
But that’s not the worst of it. The biggest problem I see with Sierra’s Optimized Storage for iCloud Drive is what happens if you decide to turn it off. First you are warned “If you continue, documents on your Desktop and in your Documents folder will be visible in iCloud Drive only”. Next you will be left with completely blank Desktop and Documents folders, even if a copy of the local data existed in the hidden locations prior to turning the feature off. Also it’s been reported that if you enable then disable this feature before giving iCloud time to completely sync everything (or if you don’t have enough space available in iCloud to complete the initial sync), this behavior can cause data loss.
11/1/16 UPDATE: One of the Macs in my lab was running macOS 10.12, with iCloud signed in, but the Store in iCloud feature disabled. I updated it to 10.12.1, rebooted, and upon reboot after logging in it came up with a setup assistant “All your files in iCloud” splash screen, with an check boxed CHECKED next to “Store files from Documents and Desktop in iCloud Drive”. Average users that have become accustomed to clicking Continue whenever prompted by Apple will turn this feature on! Be warned!!