The only thing this setting effects it the block size that Veeam uses to write.
Local 16TB => 4MB
Local => 1MB
If you do not use Veeam WAN accelerators (which use max. Compression and variable Block Length deduplication regardless of the seeting for transport), you can achive faster transport with smaller block sizes at high latency links.
But if you compare the 4MB to 256KB, you have to handle 16x more metadata and this is something that can reduce speed at datadomain write.
So in tests at datadomain the best performance and datareduction was achived by the 4MB block size.
Storage optimization (job option):
Setting the storage optimization to Local 16TB+ has been shown to improve the effectiveness of Data Domain’s deduplication. The larger this value is, the smaller the preparation phase will be for a backup task and less memory will be used to keep storage metadata in memory. https://www.veeam.com/kb1956
Hint: The block size will be the same within the whole chain. If you change the block size, you need to run an active full to enable the change on the backup chain.