The update today added support for loading mods that end in .mod instead of .zip
Mod creators are encouraged to utilize the new file extension when publishing mods to avoid the confusion of whether to extract the mod or not.
You can still use .zip to test/create your mods and legacy mods ending .zip will still function just fine.
Looked in the help file and it says default ZIP archival format is 'Deflate' so I'm going to give that a try and post back.
So here are the results since apparently nobody else had done this kind of testing before.
I ended up doing the testing myself and figured out compatible settings for PokeMMO modding.
-Archive Format: ZIP is the only one supported for modding
-Compression Level: Any setting is ok, from lowest 'Store' all the way to Ultra
-Compression Method: Deflate