This article explains Smart Objects in Photoshop and tells the different types of smart objects & how to create, edit, and convert them.

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Smart objects are useful for elements on a page that you want to be able to scale, edit and reuse numerous times.

Even Smart Objects, which retain live text in its editable form but force you to return to Illustrator to change its attributes, look pixelated when you zoom in on them in Photoshop.