We combine first-principles calculations with EXAFS studies to investigate the origin of high oxygen storage capacity in ceria-zirconia solid solution, prepared by solution combustion method. We find that nanocrystalline Ce0.5Zr0.5O2 can be reduced to Ce0.5Zr0.5O1.57 by H-2 upto 850 degrees C with an OSC of 65 cc/gm which is extremely high. Calculated local atomic-scale structure reveals the presence of long and short bonds resulting in four-fold coordination of the cations, confirmed by the EXAFS studies. Bond valence analysis of the microscopic structure and energetics is used to evaluate the strength of binding of different oxide ions and vacancies. We find the presence of strongly and weakly bound oxygens, of which the latter are responsible for the higher oxygen storage capacity in the mixed oxides than in the pure CeO2.