Is it possible to update a Sprite runtime

I would like to know how I can update my sprite run time. Here's a simplification of my problem. I have a sprite (1. image) then it get's hit by some evil circular object (2. image), could be a sprite could be anything it just a circular object this is not important. The important thing is, after the collision with the circular object I need to update the sprite and remove any part of the sprite that's overlap my circular object (3. image). I just have no idea how to accomplish this in Unity. Another important thing is my sprite is not circular it can have whatever shape. The shape below is just an example to illustrate the setup. My initial idea is to calculate the overlapping area (this is the easy part), then put manipulate all these pixels to be transparent. I don't know if this is a good solution at all?

I could really use some help to solve this thanks in advance :)