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I think of it more like email. You know how email makes an always growing local disk file even if you delete the old mail, it just reuses that space later before growing again... you have to manually tell it to shrink now and again. Seems to be similar -- it grows when it needs more space, and it puts stuff in the space sort of randomly -- optimize will reduce the space and order the data in there better. Reducing the space probably has no real performance impact, but if its fragmented in there (not sure if it is) then it will help.
yes your game will run smoother, but does take awhile.