Data values of the same consolidation setup are stored into Round Robin Archives (RRA). This is a very efficient manner to store data for a certain amount of time, while using a known and constant amount of storage space.
It works like this: If you want to store 1'000 values in 5 minute interval, RRDtool will allocate space for 1'000 data values and a header area. In the header it will store a pointer telling which slots (value) in the storage area was last written to. New values are written to the Round Robin Archive in, you guessed it, a round robin manner. This automatically limits the history to the last 1'000 values (in our example). Because you can define several RRAs within a single RRD, you can setup another one, for storing 750 data values at a 2 hour interval, for example, and thus keep a log for the last two months at a lower resolution.
The use of RRAs guarantees that the RRD does not grow over time and that old data is automatically eliminated. By using the consolidation feature, you can still keep data for a very long time, while gradually reducing the resolution of the data along the time axis.
Using different consolidation functions (CF) allows you to store exactly the type of information that actually interests you: the maximum one minute traffic on the LAN, the minimum temperature of your wine cellar, ... etc.