Smart Objects first appeared in Photoshop CS2, and represented a huge innovation for Photoshop users. A Smart Object essentially wraps up an entirely new copy of a source ﬁle and stores it inside the Photoshop document as a layer. This meant the source files for a Smart Object always traveled inside of the Photoshop document and never got lost. Smart Objects allowed embedding of things like Illustrator vector art, PDF files and Camera Raw files, and had them remain editable anytime down the road. (Linked Smart Objects are new to Photoshop CC, and allow linking rather than embedding of the original RAW ﬁle, reducing ﬁle sizes.)
In the case of the camera’s RAW files, you would first open the photo into the plug-in and make all the regular adjustments you think you might need. Then, rather than simply rendering the RAW data into a regular RGB ﬁle, holding down the shift key changes the Open Image button to Open Object, and clicking that creates the Smart Object layer. (Creating a Smart Object can also be set as the default in the Workflow Options dialog.)
RAW ﬁle Smart Objects give you an incredible amount of ﬂexibility in your workflow. For instance, at first, you might place the RAW ﬁle using the processing defaults simply for positioning or comping purposes. Then, later, if you want to change the look of the RAW image, you can do that. Double-clicking the Smart Object icon opens the embedded ﬁle in Camera Raw again, allowing you to essentially reprocess the RAW for an entirely different look, all the while preserving the exact position, scaling and filters that you applied to the original.
All of which finally brings us to Smart Filters. Smart Objects were a huge innovation in nondestructive workflows, but you couldn’t paint or run Photoshop filters on them in the same way that you would an ordinary layer. To do anything more than transform a Smart Object, you would have to "rasterize" it first, thus discarding its nondestructive qualities. Smart Filters came along in CS3 and solved that problem by working nondestructively on Smart Objects.
Then, to add chaos to mayhem, Photoshop CC came along with the new ability to run Camera Raw as a filter! In the case of an ordinary RGB layer or selection, Camera Raw can act just like any other filter, changing the pixels forever. But if you run it as a filter on a Smart Object, ACR becomes a Smart Filter. So you can now have a nondestructive filter acting on a Smart Object, which has its own nondestructive attributes!