AFAIK if you set a playlist for say 1hour 1990s Rock, then the ipod would create that from all of the tracks you have on your ipod rather than as dictated by MC.
Each time you played the playlist it would be different.
True, though that doesn't seem terribly useful -- I could create a 90's rock playlist in MC, set the iPod to shuffle, and stop listening after an hour.
For me an interesting dynamic playlist would be something like "pieces shorter than 10 minutes that I haven't listened to in 60 days", something that you can express in a MC smartlist just fine, but when you sync it to the pod, you're taking a static snapshot at the time of the sync. With a dynamic playlist, tracks would automatically be taken off the list as you listen to them, so you don't repeat yourself.
Another one might be a Favorites list defined by "pieces rated 4 or 5". Since you can rate songs on the iPod directly, a dynamic playlist would automatically capture newly-rated songs for you, without having to wait for your next MC sync.