I think the biggest problem is client support, and that some people prefer using multiple devices for chat, including web based services (GMail, Facebook Chat etc).

Even with Jabber where you can have separate resources, it's not possible to have some clients use OTR and some not (with good reason, I guess), so you either have to add a separate, non-OTR account, or get used to turning OTR on and off manually. And I'm still looking for an iPhone Jabber app with OTR support.

This is the first I've heard of OTR, do you know what good sources of information are on it?

I know that feel bro :/

OTR is only suitable for real time communication. For posting messages on facebook (as for email) you would use PGP. This used to be possible using Firefox with the FireGPG Addon, but the developer stopped working on it and a release wasn't even made for Firefox 4.

FireGPG was brilliant. It would detect blocks of PGP in the page, and add "Decrypt/Verify" links to the appropriate place in the page, and would let you easily encrypt/sign data. I can't believe nobody took over development. I keep meaning to learn how to write Firefox addons specifically so I can take up this project, but I haven't found the time.

You're misunderstanding, OTR isn't equivalent to plain text at all. For a good introduction to the details, see the CodeCon presentation on the website (http://www.cypherpunks.ca/otr/).

The encryption keys are not sent with the chat, they're generated using DH key exchange. After a conversation is finished, others may forge messages to make them look like they came from you, but they cannot read the messages you originally sent. This gives you plausible deniability, which is what you want in most use cases (if you don't, then you're right that PGP is a better option).

The key exchange is susceptible to a man in the middle attack, which can be prevented by comparing fingerprints using a separate communication channel. Once compared, all future conversations should be impossible to intercept. If your private keys are ever found (a TSA official steals your laptop), they'll be unable to decrypt past conversations. Unless you've left conversation logging on in your chat client, of course.

I never thought much about using OTR until i logged into GMail and discovered reams and reams of OTR conversations stored in the chat logs. I never used the GMail Chat client, and this was a real eye-opener for me. Had I not been using OTR, Google would have stored a couple of years worth of conversations between my friends and kept them forever.

By the way, ZFone / ZRTP (http://zfoneproject.com/) is a protocol using similar ideas, but for VoIP calls.

You are misunderstanding, in the latter case. Asymmetric cryptography is used to determine a session shared secret. The deniability aspect is that either participant can generate messages in the same session. Alice receiving X from Bob knows that either Alice or Bob wrote X (assuming the session secret stays secret). Alice cannot prove to Carol that Bob wrote X because Alice's inference of this is dependent on local knowledge that Alice did not write X.