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Smart Objects was introduced back in CS2.  At the time, I did not find much use for it, but recognized that it can come in handy in some occasions.  They do make certain types of changes harder, some functions are not available when using Smart Objects, but they are an excellent tool for non-destructive changes.  Here is a case where they came in extremely handy:

I have started doing a lot more with Photobooks lately.  The first “real” wedding book that I did, took about 12 hours total from scratch (no templates).  If I had not started with objects that time would have been doubled or even tripled.  The time savings comes from being able to move images around, resize, and reposition them easily and without having to go back to the source.

What is a smart object?

A smart object is a “copy” of an image, be it a photograph, vector art, or just about anything that can be its own file and layer.   The object is inserted, as is, into a layer which can be acted upon without modifying the source.

Why use Smart Objects?

The easiest way to tell you is to show you.

1. Find a small image that you would like to test with.  Create a file in Photoshop that is the same, or slightly larger.  Use “White” as your background.  Please note the size of the “test” image.  We’ll assume 400 px X 400px.
   1. Open your image, and Copy its content.  Select All (CTRL+A), Copy (CTRL+C).
   2. Switch to your newly created empty file, and Paste (CTRL+V)
   3. Notice the smoothness of the image.
2. Edit -> Free Transform or CTRL + T
3. In the toolbar for the Transform change, change W: 100px, and H: 100px (25% of the original), and Click the Check Mark.
4. Now increase the size of the layer back by reversing the process.
5. Edit-> Free Transform or CTRL+T
6. In the toolbar for the transform tool, change W: 400px and H: 400px back to the original size of the image.
7. Notice how badly the image is pixilated. This is because the act of reducing the image is destructive.  All extra data after the change is lost.  So if you try to increase the size or get a color or part of the image back – it’s gone.

Now repeat the process, except:

Instead of 1a, 1b, 1c … use File -> Place, and insert the “test” insert as a smart Object. Also instead of using “px” as the size you can use 10% as the scale option.  When you go back to try to increase the size of the layer again, it knows that it is at 10% and you can use 100% to go back to the original size.