There is a lot happening in the song and on the stage:
About the song: at the beginning, Bob Dylan is referring to the songwriting skills of Townes Van Zandt, whom he greatly admires, obviously.
In the song: “you wear your skin like it’s art” is a quote I sometimes say to folks who have tattoos. It can be a compliment, but it also has much deeper meanings.
On the stage: Marty Stuart is playing the mandolin in the background. His playing adds both depth and range to the song.
BTW: in the YouTube comments, Paul Schuster writes [edited for grammar]: “I’ll make it clear… THIS SONG WAS WRITTEN BY TOWNES VAN ZANDT, not Willie Nelson. Townes said the words just came to him one night, and he has no idea what they really mean….”
“Years later Townes and his friend were pulled over by the cops. They asked him what he did and Townes told them that he is songwriter. They sorted of snickered at that. Then Townes ask them if they had heard the song “Poncho and Lefty” because he wrote it… They looked puzzled. It ends up that the two cops, one white and the other Hispanic were nicknamed Poncho and Lefty by their coworkers…. RIP Townes. We miss you.”
Proof again that songs have amazing lives even after the songwriter is gone. — Skip