In the FoF Upload configuration page, the second field (first dropdown) is the storage location selector. "local" means hosted on the same server as Flarum under the assets
folder.
If you are using FreeFlarum I believe they have disabled the "local" option because their hosting does not offer storage space for files. So you have to configure and use one of the external storage methods.
If you self-host Flarum, the default configuration of FoF Upload should work out of the box to upload images to the local assets
folder. Only more advanced use cases require customization of the settings.