Prefabs: the file, the copies, and the edits in between

the short answer

What is a prefab in Unity?

A prefab is a GameObject saved as a file in the Project panel; the copies in your scenes all follow it, so editing the file changes every one of them. Edit a copy instead and the change is an override on that copy alone — shown in bold, with Apply All and Revert All in the Overrides dropdown.

A prefab is a GameObject saved as a file. The copies you drop into scenes are not copies of each other — they all follow that one file, so changing it changes all of them at once. That is the whole idea, and everything confusing about prefabs comes from one question: am I editing the file, or one copy of it?

Making one

1
Build the object in the scene until it is what you want: mesh, material, collider, scripts, children, all of it.
2
Drag it from the Hierarchy into a folder in the Project panel. Its name in the Hierarchy turns blue: that copy is now an instance of a file on disk.
3
Drag the file back into the scene as many times as you like. Twenty enemies, one file.

Editing the file, not one copy

Double-click the prefab in the Project panel and Unity opens Prefab Mode: the object alone, on an empty stage, with nothing else in the way. Whatever you change there is the file, so every instance in every scene follows immediately.

Change an instance in the scene instead, and you get an override: that one property, on that one copy, now ignores the file. The Inspector shows it in bold with a blue line in the margin.
The Overrides dropdown at the top of the Inspector lists every one of them, and gives you the two buttons that matter: Apply All, which writes them back into the file, and Revert All, which throws them away.
Overrides are not a mistake. A patrol point, a speed, a colour that differs per copy is exactly what they are for — but a copy with thirty of them is a prefab in name only.

Variants, for the enemy that is almost the same

A Prefab Variant is a prefab based on another one: it keeps everything from its parent and changes a few things on top. Make the base Enemy, then a Fast Enemy variant that only changes speed and colour — fix a bug in the base and both are fixed.

Right-click the prefab in the Project panel → Create▸Prefab Variant, then open the variant and change what makes it different.
A prefab can also sit inside another prefab — a wheel inside a car — and each keeps its own link. Unity calls that a nested prefab, and it behaves exactly like the outer one.

Spawning one from code

Spawner.cs — the field holds the file, never the copy in the scene

using UnityEngine;

public class Spawner : MonoBehaviour
{
    public GameObject enemyPrefab;   // drag the asset from the Project panel

    void Start()
    {
        Instantiate(enemyPrefab, transform.position, Quaternion.identity);
    }
}

Drag the file from the Project panel into that slot — not the copy standing in the Hierarchy. Point it at a scene object and everything works until that object is deleted or disabled, which is the bug behind half the broken spawners ever written. Instantiate has a guide of its own.

Two states worth recognising

A red object named Missing Prefab means the file it followed was deleted or moved outside Unity. The object in the scene is an empty shell; put the file back, or delete the shell.
Prefab > Unpack breaks the link on purpose: you keep the objects, and they stop following the file. Useful once, for a piece of scenery you will never reuse; regrettable everywhere else.

the lesson that builds this

Block prefabs

This post is a standalone recipe. In the course, the same thing is built as part of the one project that runs through all five tabs — Basics, lesson 07.