Dynamic NFTs are “living” NFTs designed to be programmable and responsive to external inputs or conditions, opening up new opportunities for personalization, interactivity and value creation in the digital creator economy.

Here’s how it typically works:

1. A dynamic NFT is minted by a smart contract with a set of metadata.

2. The smart contract obtains data from oracles. These are third-party services that provide external information from data sources, such as Internet of Things (IoT) data and web application programming interfaces (APIs).

3. The NFT is then evaluated by the smart contract using data obtained from oracles to evaluate the NFT and encode changes during the minting process.

4. The characteristics of the dynamic NFT will then be updated when necessary.

1. Identity

- If blockchain-based identity becomes a reality, dynamic NFTs may actually be used to represent digital identity cards or passports around the world. 

- The flexibility of these NFTs would allow changes to be updated automatically without digital identity documents needing replacement. 

2. Gaming

- The ERC-1155 token standard is used mainly in NFT gaming, so it’s no surprise that dynamic NFTs are most commonly found in blockchain games. 

- Players can level up their avatars using dynamic NFTs to represent their in-game characters, thereby enhancing the gaming experience. 

3. Virtual real estate

- While real estate tokenization has been around for some time, static NFTs are unable to reflect changing factors, like property prices, age, and ownership.

- Dynamic NFTs, on the other hand, can capture the finer details of real estate and possess the flexibility needed for specific information updates.

4. Art

- Digital artists can use real-time data to encode changes in their artwork to convey this impermanence, making their art pieces more unique. 

- For instance, there are dynamic NFT artworks whose appearances change based on the current weather or season.

- NFT art can also be elevated by mimicking real-world art installations that require audience participation to be appreciated. 

- In this instance, a dynamic NFT could change depending on the token holder’s interaction with their asset and in doing so, advance engagement at digital art exhibitions.

Increased engagement: Constant changes keep users coming back for more.

1. More immersive experiences

They can react to real-world events, like a game character leveling up.

2. Boosted fan loyalty

Dynamic NFTs can offer evolving perks or content to users, building stronger communities.

3. Flexible monetization

Their adaptability allows creators to experiment with different revenue models.

4. Innovation driver

The ability to update makes them perfect for tech-forward projects and interactive experiences.