Xbox 360 helped pioneer downloadable games on console, but its teensy-tiny external storage limitations still reflect those early days nearly ten years later. You won't have to wait too much longer to decommission your fleet of thumb drives, because an upcoming update will allow the system to use up to 2TB of storage per external device, according to the official Major Nelson blog.
Xbox 360 is currently only able to use up to 32GB of external storage, or 64GB if you have two USB drives plugged in. That was fine back when Castle Crashers was the new hotness in 140MB, but it's gotten more than a little restrictive in the age of Xbox Live Games with Gold. Of course, it doesn't help that Microsoft's proprietary internal hard drives are pretty light on storage for the price.
The update will also stop Xbox 360s from automatically reserving all available space on external drives. So if you're only storing 16GB worth of Xbox stuff on a 32GB drive, you'll be free to use the other half for whatever else. Unfortunately, you will need to clear off any old drives that already have reserved space to free up that extra storage.
The update will roll out for Xbox 360 Preview Program members soon, and everyone else should get it "later this year."