The encyclopedia is a relational database in a single subdirectory on your computer. It does not matter whether you are working on a standalone PC, or as part of a network in a client/server system. The relationship between the encyclopedia and a sub-directory is 1-to-1. That is, the encyclopedia is in a subdirectory; one subdirectory contains just one encyclopedia.
You can create encyclopedias up to the limit of your disk space. You might have several encyclopedias: for example, you might create a new encyclopedia each time you start a new project, but that is entirely an individual decision.
All the diagrams and all the definitions, both those associated with diagrams and those that are not, are in the encyclopedia. In addition, other files are in the encyclopedia: see Makeup of the encyclopedia.