A model is suggested that describes the interaction of grain boundary (GB) sliding, lattice slip and diffusion as well as the combined effects of these processes on deformation behavior of nanocrystalline ceramics and metals. Within the model, GB sliding accommodated by lattice slip creates special defect configurations - disclination dipoles - near triple junctions of GBs. In the absence of GB diffusion these dipoles hinder considerable GB sliding and result in pronounced strain hardening of nanocrystalline materials. In parallel with these effects, high stresses created by disclination dipoles induce GB diffusion that decreases disclination stresses. Thereby GB diffusion diminishes strain hardening of nanocrystalline solids. The moderate strain hardening, resulting from the interaction of GB sliding and diffusion, suppresses plastic strain instability and, at the same time, does not lead to very high values of the flow stress capable of initiating crack generation and growth processes.