How does photo stream work in ios 8?

From what I understand in the keynote they indicated photo storage would use your iCloud storage. So you get 5GB for free and if you have more than 5GB of photos you will need to buy additional iCloud storage. Keep in my that free 5GB is not just for photos but for any iCloud data including iOS backups.

For now they mentioned they will offer up to 1TB of storage, however it won't be free. You will need to pay a monthly/annual fee about the 5GB.

 

In the current beta you have two options for photos... Photo Stream, which works exactly like it did on iOS 7... 1000 photos/30 days max, doesn't count against your 5G of storage, etc.

The new feature is the iCloud Photo Library. Enabling that will disable Photo Stream and upload all photos and videos and sync them across all your iOS devices. That will count against your 5G of iCloud space, however, it will not store full resolution copy of every picture on your device, so you can have a 16G iPhone with access to much more than 16G worth of photos and videos. In the current beta they don't have a way to manage how much local storage the iCloud Photo Library uses, but that should be coming in future betas.