Resolved 01/07/21! Ignore this post or read update.

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Written at 01/03/2021. Information is subject to becoming outdated, most likely 2-3 days after publication.

Introduction

Due to recent issues with OptiFabric and Fabric API, I figured I would bang this out in case OptiFabric isn't updated to use the most current API. As an extra fun bonus, I also figured out how to receive the current light level of blocks within the general vicinity to show their light levels which requires the same trick of older software versions. If you're just getting into Minecraft modding for the first time, and want OptiFine with Fabric, your first experience doesn't have to be so hard and raw with the help of this guide.

Fabric issues

After opening the Fabric executable, feel free to install the latest Fabric build. That isn't the problem — For the Fabric API, which contains a bunch of extra functionality held separate and mutually exclusive from Fabric itself, all mods which depend on it must agree with the version of Fabric API in use for the game to not crash or for the game to launch without issues prior to crashing intentionally for halting operation.

The ongoing issue as of this writing is OptiFabric, which does not agree with the current API. This guide comes from an investigative effort to figure out why when trying to use another mod, my entire Fabric profile would always crash on launch and it was because of this.

Resolution

Below is how to resolve the above problems —

OptiFine

On top of getting the latest JAR from OptiFIne's website, the following combination is the latest which will work with Minecraft 1.16.4 until OptiFabric is updated:
Fabric API 0.28.4 (Replaces 0.29.1)
OptiFabric 1.8.13 (current!)

Until OptiFabric updates, Fabric API must remain downgraded. Once ChocoHead fixes up OptiFabric to not suck (and thus, not have his inbox light up), the above advice becomes useless as everything at that point should be upgraded to latest versions.

Light Overlay

This is the mod which began my efforts, and is the reason why I am writing this blog post. The current version of Light Overlay requires the latest version of Fabric API. But the latest version of Fabric API breaks OptiFabric. To resolve these dependency issues, downgrading Light Overlay was also necessary. As provided:
Light Overlay 5.5.4
Architectury 1.2.68 (current!)

Until OptiFabric becomes compatible with the latest version of Fabric API, Light Overlay must remain downgraded as it is dependent on Fabric API 0.28.4.

Conclusion

OptiFabric is just being a right pain in the arse right now, along with Light Overlay. Whenever there is an update for it which resolves operation with Fabric API 0.29.1, then Fabric API, as well OptiFabric and Light Overlay can be updated as they should both function with the latest version of Fabric API.