The first version of non-fungible assets was static in nature: the data attached to these assets is fixed and cannot be changed after creation. While the first version was great at digitizing unique assets, it was limited to use cases such as digital art.
Allowing for the data attached to the asset to be adapted and changed in response to certain events and conditions opens up entirely new use cases for non-fungible assets.
The data attached to dynamic non-fungible assets can be changed after creation to produce an asset that can grow in complexity and utility over time. Coding the logic for the changes into smart contracts can create a dynamic and unique asset that programmatically changes over time.
A great illustration from Chainlink of what a dynamic non-fungible asset can do in the case of digitizing real assets where new information can be added to the asset over time:
Further reading: https://blog.chain.link/what-is-a-dynamic-nft/