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In context, I wrote an analysis on the basis of creation myths. I describe the limited power of one of the gods compared to another. Is the first or second sentence correct in grammar, or both?

...[he] used his magic to create flora and fauna, but his magic was limited.

...[he] used his magic to create flora and fauna, but his magic limited.

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"...[he] used his magic to create flora and fauna, but his magic was limited."

is the correct sentence. This is because his magic can be described as limited, so it was limited.

Saying that "his magic limited" means that the magic performs the verb, which does not make sense in the context.

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If you look at a dictionary, you will find that the verb "to limit" is a transitive verb. When used in the active voice, such a verb requires both a subject, which specifies what acts, and a direct object, which specifies what is acted upon. Your second sentence contains a verb in the active voice without a direct object and thus is grammatically incomplete. What does his magic restrain or bind, the frost giants? Even if completed properly, the second sentence would have a meaning entirely different from that of the first sentence, which is grammatical.

The verb in the first sentence is in the passive voice, means that the subject of the sentence is what the verb acts on. The actor need not be specified when using the passive voice. Thus, the first sentence is grammatical and means that his magic is not all-powerful.