OTA updates to CM nightly I know that premium version of ROM manager allows OTA updates to the nightly builds and there is also the old(deprecated) cyanogen updater on google-code. 
Is there any way to do an OTA without using ROM manager? How does an OTA work? Does it actually just replace the existing firmware.
If you want to update CyanogenMod nightly builds Over The Air you'll need the premium version of ROM manager, this is the way to obtain donations to the project.

An OTA update is basically a download of a full ROM or a patch of some files that is saved to the storage of your phone and once it’s downloaded it installs automatically the full ROM or the patch to the phone. This system is used in many Android phones to deliver updates without the need to connect the phone to a computer to update the system.