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What is the core usage of a Component Definition item?

Is it used to store the rendering parameters of the component? Or does it allow the component to be added to a placeholder? Or Both?

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Component/Rendering/Sublayout (depending how you call it or which technology you are using WebForms or MVC) definition item is an item in Sitecore content tree which defines a rendering.

It is used for storing following information:

  • Name
  • Description
  • Experience Editor buttons
  • Global Caching options (if set here will be applied to all instance of rendering).
  • what is the Controller name and Action name that should be used to render rendering (in case you are using MVC)
  • What is the path to the view file (if you are using WebForms or xslt)
  • Parameters Template - what is the template of rendering paramters. If you open renderings options in Experience Editor you will see those options
  • Default datasource location
  • Datasource template

As you can see it describe the rendering in general. We can say it describe the type of a rendering (similar analogy to object oriented programming concept of type and instance of types)

It is used to store the rendering parameters of the component

No. Like I said above it is just a rendering (type) definition. If you add rendering to a page then it will create an instance of this rendering but rendering parameters won't be stored in component definition item but in __Renderings or __Final Renderings fields of your current page item)

This is how rendering instance is stored in one of those fields:

<r uid="{B343725A-3A93-446E-A9C8-3A2CBD3DB489}" s:par="Param1=Value1" />

Notice the s:par attribute.

or it allows the components to be added to a placeholder?

To define whether rendering can be added to a particular placeholder is set in different place. Search for Placeholder Settings to learn more.

This video might give you some overview:

Friday Sitecore Best Practice: How to Properly Use Placeholder Settings https://www.youtube.com/watch?v=HDNdVLFTNLc

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