Everything is kept (in case failover is used) on a storage host of your choice. And, yes, you must have disk space to keep copies of VPSes from hosts you set to use it as storage.
The user chooses for each host where the replication of VPSes will be synced, including the path on storage. That means you can have multiple disks/partitions for this purpose.
Failover is defined, for each host, under Settings->duplications module of SERVERware.
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