I am trying to isolate what this setting does exactly.
I suspect it adjusts LOD and whatnot to help you maintain your target FPS within limits but we really lack info about this setting, and that makes it hard to get the most from it, or to know when it may be most useful.
same here. Did you find anything?
It would be great if Asobo could give us an explanation about what each of the settings do and what the implications are when combined with something else. I know there is a basic explanation but for folk who don’t know much about graphics settings it’s still confusing 
“Dynamic settings” automatically adjust the TLOD and OLOD to reach your target FPS (for example, 30 FPS).
If your GPU/CPU can’t maintain the desired FPS (30 FPS in this example), dynamic settings reduces the TLOD/OLOD by a factor of up to 0.5. If your TLOD is set to 400 by default, for example, it will gradually lower it to a minimum of 200. The same principle applies to the OLOD.
The result is improved smoothness and reduced stuttering at the cost of a slight loss of visual quality (generally minimal if you start with a high TLOD/OLOD).
The current value is displayed in the panel that shows the FPS (Dev Mode / Display FPS). A value of 1 indicates that the TLOD is at its default value, which is 400 in this example. If the rate is 0.5, it means 400Ă—0.5=200.
If at some point the GPU/CPU recovers, the TLOD/OLOD rates gradually rise back up to 1.
Some believe that dynamic settings affect other settings besides TLOD/OLOD, but without any certainty.
Thanks John, question, in your 2nd paragraph, you say the CPU GPU will lower settings - is this automatically without me doing something?
Works only if you enabled Dynamic settings
Aah, thanks for explaining 
Adding that it works splendidly for me and my flying in 4k with a large screen freesync TV limited to 60Hz. With DLSS/Quality 310.4 preset K via DLSS Swapper, I get my full 60 FPS unless changing views/panning around resource intensive airports/scenery. Even then everything works smoothly so I can control my flight. My glass cockpit displays are smooth and legible and there is no ghosting externally like in earlier/default versions of DLSS. These two technologies, Dynamic Settings and DLSS 4, have come a LONG way this year so folks might want to keep an open mind and try them every now and again to see if they work for their flight sim needs. Cheers!
In my experience, the recovery is fairly rapid on my PC. And since I am busy flying, focusing on my instruments and view outside rather than a frame rate counter, the view recovers fast enough.
Also in my experience, I do not believe that dynamic settings are modulating anything other than LODs, but I have no evidence in support of this belief. That said, what I have done to increase the utility of Dynamic Settings is lowering setting that are not important to my flying, eg, Fauna, traffic, etc.
Personally, I’m using TLOD 400 and OLOD 200, and I’ve preset “Dynamic settings” to 30 fps, but I don’t normally enable it to maintain the best possible visual quality.
However, in situations where I feel the framerate is starting to suffer, typically in photogrammetry areas or complex airports, I then enable “Dynamic settings” in the settings menu to restore good fluidity.
With a little practice, you can enable/disable it in 3 seconds. It doesn’t necessarily need to be left on all the time.
Dynamic settings is a game changer if you master it.
Good to know, but I think I will continue to just leave it on, as I get my target 60 FPS most of the time on most flights. Both LODs set at 200, I’ve never seen the need for higher given my output to HDTV.
Cheers!