What could be some issues in scalability if a block time of 0 is set to a private ethereum blockchain? If I set it to zero, blocks will only be added to the blockchain every time there's a single transaction. But what happens when the chain scales and you have say, 100 transactions occurring at the same time?

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This is, based on the miner implementation, driven by the function of a Nonce. Not the transaction nonce, a separate POW nonce.

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