Does Parachute Backup work with Optimize Storage turned on?

Yes, and you always get the full-resolution originals. Parachute Backup downloads each item from iCloud as it reaches it and copies it to your destination, one item at a time. You only need a little more free space than your largest photo or video, not room for the whole library.

iCloud Drive files that Parachute Backup downloaded are released again right after copying. For photos, the system decides when to free that space, so your Photos library can take up more room than usual for a while.

On Mac

On the Mac, the setting is called Optimize Mac Storage.

On iPhone and iPad

On iPhone and iPad, the setting is called Optimize iPhone Storage or Optimize iPad Storage.