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I have used photoshop templates where you place an image in a embedded smart object, save and then the changes are applied in the file. The image placed in the embedded smart object has multiple layers of the same design amongst different groups in the templates I have used. How is this possible? do you just duplicate the layer and each one is update when altering the separate embedded file?

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When you create a smart object, you basically create a "file" linked to the layer. When you duplicate the smart object, you just create another iteration, linked to the same "file".

So yes, duplicating is the way to do such templates.

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