If an entire map is covered with smoke then the vision of both sides is reduced to that of night missions,
At night, the aliens see you like it's day. In smoke, the aliens' vision is also reduced. A disadvantage is sometimes one unit can see another but the other can't see the one. It's difficult to predict but sometimes you can be denied mutual surprise or see an alien that can't react.
This limitation is fixed in openxcom IIRC. Spam smoke as much as you'd like.
Yes, openxcom has very large stack sizes, so things like fire, smoke, ship items, units on the map, etc. are essentially limitless. I just ran a test by throwing down some 4000 tiles of smoke (~70% of a 4x4 map, total 6400 tiles minus terrain blocks).
I think there are a few advantages to being able to throw down smoke on your own turn:
1.) You can spot an alien (that can't shoot due to mutual surprise), then you can hide it with smoke and mow it down without incurring reaction fire. There are other ways to suppress reaction fire, such as running back out of sight range, or using more distant snipers. But it's a thing you can do to gain an advantage and in some situations it's the best option.
2.) You can use it to get off the ship safely. Aliens very frequently hide near the front end of the ship, making it impossible to exit without being shot at, unless somehow they can't see you. You can alternatively use blaster bombs to clear the area, but that's actually more expensive and less successful.
3.) If aliens see you during your turn, their psionic users begin tracking you immediately and can follow those soldiers for several turns even if no alien can see them. Masking your soldiers in smoke right away prevents them from getting on the psionic attack list.
Thanks so much for the responses! I'm getting a good idea of your feelings on smoke but I'd still like to hear more. Also, how do you guys use proximity grenades?