The correct option is Stores instances of custom resources in etcd through the API server.

When a Custom Resource Definition is added the API server extends the Kubernetes API and accepts objects of the new kind. The API server persists custom resource objects in etcd and exposes them through the standard API endpoints so controllers and users can read and modify them.

Distributes CRD definitions to each node's kubelet is incorrect because kubelets do not receive or host API type definitions. The API server provides discovery and stores the CRD metadata and schema centrally in etcd rather than pushing definitions to node agents.

Automatically provisions a controller process for every new CRD is incorrect because Kubernetes does not spawn controller processes automatically. Controllers are separate components or deployments and must be installed or run by operators or tooling if reconciliation logic is required.

Executes custom controller logic when a custom resource is applied is incorrect because the API server only stores and serves resource objects and enforces validation. Controller logic runs in controller processes that watch the API server and then reconcile state, and that execution is not performed by the API server itself.

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