Off course there is a way to make the b64 from DALLE smaller by compressing it. You can try the PIL library with Python. CHeck the following example where we can use the PIL library for resizing and compressing it before converting it to base64.

import io
from PIL import Image

# convert base64 image to bytes
image_bytes = io.BytesIO(base64.b64decode(image))

# open image with PIL
pil_image = Image.open(image_bytes)

# this is to resize and compress image
max_size = 256
quality = 80  # adjust quality to get smaller file size
pil_image = pil_image.resize((max_size, max_size))
pil_image.save(image_bytes, format='JPEG', quality=quality)

# convert compressed image to base64
compressed_image = base64.b64encode(image_bytes.getvalue()).decode('utf-8')

Here is a solution with detailed explanation

#Going by the comments in your code
#content of data variable is first gzip compressed and then base64 encoded
#In order to get the original content back, you must, 
#first base64 decode and then gzip uncompress it

#since gzip works on file objects, StringIO is to be used 
#StringIO module implements a file-like class, that reads and writes a string buffer 

import StringIO
import base64
import gzip

data = "...." #gzip compressed => base64 encoded
b64decoded = base64.b64decode(data) # base64 decode 
inputstream = StringIO.StringIO();
inputstream.write(b64decoded)
inputstream.seek(0)
#
uncompressGzip = gzip.GzipFile(fileobj=inputstream, mode='rb') # gzip uncompress
originalData = uncompressGzip.read()
print(originalData)

Here is a simple test, compress => encode => decode => uncompress

import StringIO
import base64
import gzip

buf = StringIO.StringIO()
compressGzip = gzip.GzipFile(fileobj=buf, mode="wb")
compressGzip.write("Hello, how are you?")
compressGzip.close()
buf.seek(0)
data = base64.b64encode(buf.getvalue())
# your solution from this point onwards
b64decoded = base64.b64decode(data) # base64 decode 
inputstream = StringIO.StringIO();
inputstream.write(b64decoded)
inputstream.seek(0)
#
uncompressGzip = gzip.GzipFile(fileobj=inputstream, mode='rb') # gzip uncompress
originalData = uncompressGzip.read()
print(originalData)

You need to read the file:

with open("/root/scriptss/test.sh") as inputfile:
    teststr = zlib.compress(inputfile.read()).encode('base64')
    print teststr

zlib.compress() takes a string to compress, not a filename.

This code does the job (Python 3):

import io
import base64
from PIL import Image

base64_str = 'iVBORw0KGgoAAAANSUhEUgAAAAUAAAAFCAYAAACNbyblAAAAHElEQVQI12P4//8/w38GIAXDIBKE0DHxgljNBAAO9TXL0Y4OHwAAAABJRU5ErkJggg=='

buffer = io.BytesIO()
imgdata = base64.b64decode(base64_str)
img = Image.open(io.BytesIO(imgdata))
new_img = img.resize((2, 2))  # x, y
new_img.save(buffer, format="PNG")
img_b64 = base64.b64encode(buffer.getvalue())
print(str(img_b64)[2:-1])

EDIT: Reducing the size of a base64 image does not imply reducing the file size.

Yes, encoding the images directly using base64 seems like a reasonable approach, given they're only thumbnails. This is similar to using data: URLs in a webpage for the same reason.

Doing it should be as simple as calling the same Images API transforms you do in your regular code to generate the thumbnail, then serializing the resulting output as base64. You probably want to cache the result in memcache - in both handlers - to prevent redundant calls to the Images API. Alternately, you could calculate the thumbnail when the image is first uploaded, and store it alongside the full-size image.