If I decide to make a game which has to versions of each level - SD and HD, and decide to load the correct layout depending on the users device resolution ...
I understand that the whole game size will be larger, but that issue aside - would this system work in supporting old and new devices?
Thank you in advance!
The engine loads only those assets which are needed for the layout. Once you switch to another layout, engine will remove all (with the exception - read on) assets from the memory and load those which are needed for the new layout. if layout1 and layout2 have common assets then those common ones won't be removed from the memory, they will remain in the memory to avoid a pointless reloading. So it is done in a very decent way.
So this will work, but in this case as I understand you want to make 2 layouts for each - let's call it - level, so you'll build your games twice inside one project.
You have to ask yourself if it's really worth it. C2 engine has really good up/down scaling so you might consider using assets with a quality in between. Also C2 gives you several features/options to manipulate the rendering quality programmatically, you might find this useful instead.
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Thanks heaps for your detailed answer, it helps clear things up