Depends how much he demands. If he's happy to take $8M a year right now, then you extend him now and lock him in at that money. That way you have him at a price that, in today's environment, is appropriate for a 2nd unit guy and/or 6th man. so you can't really lose.
Problem is, it's unlikely he'd agree to that type of money given that Avery Bradley got $7M a year, Crowder got about $7M a year - and both of those deals happened when the Salary Cap was roughly half what it is now. Most likely, then, that Smart is going to demand at least $12M-$15M a year and that may be too much money to pay a backup PG who has major flaws and has shown no real development after 3-4 years in the league.
In this case you'd want to wait out until at least near the All-Star break and see if he shows and development up to that point (improvements in his jumper, improved quickness from superior fitness, etc) and if his game takes a significant step in the right direction, then do it.
If you get to that point and he's still made no improvements, still can't shoot, and still has all the same flaws in his game - then you might need to play hardball. Offer him maybe $10m - $12m max and if he doesn't accept that, then Boston can try to pull off a trade of Smart and picks.
Probably will also depend on how other young guys (Rozier, Brown, Tatum) progress by that point in the season as well - has Rozier stepped up and proven he's good enough to backKyrie up full time? That will likely play a huge role in determining whether Smart would stay or go, too...all the more reason to hold off for half a season or so and see how guys are progressing.