Three-dimensional computational fluid dynamics models are developed to understand physical principles of self-reacting friction stir welding process. A novel approach of predicting the weld microstructure based on plastic strain distribution at cross-section behind the tool is proposed and verified with experimental results. Limitations and credibility of shear stress and velocity tool/workpiece boundary condition are evaluated from the perspective of the weld formation mechanism. The importance of the shear layer and its sticking/sliding transition state in weld formation mechanism is emphasized. From modeling perspective, shear stress boundary, which only represents a sliding condition, neglects the movement and effects of this shear layer. When shear layer is formed, due to the velocity discontinuity which could not be captured in fluid model, velocity boundary condition, which represents an averaging effect of sticking/sliding transition between tool and shear layer, is needed.