A smart object is a special type of layer whose contents are protected and remain fully editable.
The SO layer could consist of a bunch of regular pixel layers, but in this case it's a copy of the raw file that gets encased in the SO. Once in Photoshop, the SO can be transformed, cropped, receive filters - all of which can be reversed. You can also just double click the SO and you're back into ACR. Change the settings, go back to Photoshop, and the raw adjustments are applied, as are the subsequent editing steps like transformations and filters.
The resulting TIF/PSD file is bigger, because of the copy of the raw file. But the advantage is that you can make adjustments on raw data, so you're getting better data rendered into Photoshop, and you can keep tweaking the conversion. Just try it.
John