When people say "Limitations breed creativity," they are saying that people do more interesting things when they are presented with a barrier and aren't given excessive freedom. They will find a way around the barrier, or they will find a way to make their side of the barrier more palatable.

As an example, I once joined a magical girl roleplay. I didn't like it very much, but that's not really important. I wanted to make a medusa themed girl, with some pirate themes thrown in. Medusa traditionally dwelled on an island by the sea, so it wasn't a huge stretch. But the GM would have none of that, and said that the snake aspect of my character was too far outside the boundaries of what a pirate was. But I really liked her powers, particularly her paralyzing stare and how her hair could be used as a weapon. So instead I made her more of a pirate captain who drew influence from all the great pirates. She had burning wicks in her hair like black beard that could be used as weapons. She also had the intense gaze of a pirate captain, which often caused people to stop in their tracks. So while I didn't get to play as my medusa/pirate hybrid, I got to use all the powers I wanted to and made one of the most unique magical girls the RP saw. While it did ruin some of the backstory stuff between medusa and my character both having similer origins, she was definitely the most interesting pirate magical girl I'd ever seen. all because a GM told me I couldn't have a medusa pirate girl.

Limitations definitely make for more interesting stories.