If the intended behavior is to show the game icon, then the system should correctly use the game icon instead of the thumbnail, because thumbnails appear extremely low quality and pixelated.
However, if it is supposed to use the thumbnail, then in that case, the thumbnail quality must be improved, as the current resolution is far too low and results in a very poor visual experience.
According to Avatar Editor Service documentation, AvatarEditorService:PromptSetFavorite() is only intended for use with Avatar Assets and Bundles. PlaceId is not an officially supported use of this API.