It can be tempting to create a prefab from every single Game Object in your project. But it is best to keep a good balance between Game Objects and prefabs to prevent your project from turning into complex chaos. In general, create a prefab if:
If you will use the Game Object (or a similar Game Object) in more than one place in your project. Creating a prefab from the Game Object will give you a single place to edit it, so you don’t have to manually copy changes between multiple Game Objects.
If the Game Object is not specific for the scene it is in. Even if the Game Object is only used in a single scene. If the usage of that Game Object is not specific for the scene then it is better to save the Game Object as a prefab and put it in a well-structured folder. That way, it is easier and more intuitive to find the data and Game Objects that you want to edit.
For example, imagine you have a Game Object with a script that manages the game state, let’s call it the ‘Game State Manager’. You can put the Game State Manager in the first scene that is opened when you start the game. It makes sense to have the Game Object there, because that scene will be loaded first, meaning that the Game State Manager will be started when the game starts and can manage the game state from that moment on.
However, someone else in your team (or yourself, 6 months from now) might not know which scene is loaded first. So if they are looking to edit some settings in the Game State Manager then they won’t know what scene to open and where that Game Object is saved.
That is why, in this case, it is better to save the Game Object as a prefab in a specific folder. Then, anyone can find and edit the Game Object easily by searching through the folder structure in the project or doing a quick search in the search field.
If multiple people will work on the Game Object and the scene it is in at the same time. By creating a prefab from the Game Object you can separate the location where the data for that Game Object is saved. That will allow multiple people to work on the Game Object and scene separately.