Lively is using Google Talk for the underlying chat mechanism. Text appears in bubbles (comic style) above the 3D avatars.
Users can design their own Virtual Room, which reflects their personality or interests, and chat with friends.
The project is still in beta, however it is really easy to try it, as it only requires a plug-in for the Web browser (currently available for Firefox and IE).
Here is a list of the popular rooms.
And here is an introductory video from the official release announcement: