How much disk space can I use?
Can I use all 20GB of storage on my droplet, or do I need to leave a certain amount of free space for the OS, software, updates, etc?
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The 20 GB includes the entire hard disk image which your distribution is installed on. You can use all of it whether it's by installing updates or by storing media files.
EDIT: It's as if you had a computer with a 20 GB hard disk.