LiveOS overlays are employed as write-once files, which always consume
space—never releasing space for reuse. Should the overlay storage
space, whether temporary or persistent, be totally consumed, the
system will likely crash with Input/output or Bus errors. If such a
crash does occur while using temporary storage space for the overlay,
a simple reboot will rectify the situation. With persistent storage
the situation is more dire and will require ... (I don't know this
case at all). In either case, achieving the reboot likely will
require a hard reset since attempting a software initiated reboot will
probably fail with more Input/output or Bus errors.
... will require appending "reset_overlay" (think that's right) to the
kernel command line on boot-up, which will reset the state to its
initial boot (though it won't reset a persistent home, of course).
It's not quite true that a live overlay will never release space. I
think if you created a file that got stored in the overlay, and then you
deleted it, you'd reclaim the space. But what it can't do is reclaim
space that's used by the squashfs image: deleting things from there will
do something to mark them as deleted in the filesystem, but you won't be
able to use the space, since it wasn't ever taking up any overlay space
in the first place.
I think the overlay operates at the sector level, but I'm not certain of