Multiple domains: Is using a separate database for each civiCRM site a better option than using domain id for separating different datasets?

In my opinion, they are equivalent options. Managing one database is a bit easier than managing multiple databases. To a large extent, it comes down to what you are comfortable with.

First define the multiple sites in drupal/sites, then put the civicrm settings.php file in the specific site/domain, and then configure the civicrm settings file to point to the databases created for civicrm.

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