Highlight, the frictionless proximity-based auto-social network, was SXSW’s belle of the ball. By Mashable’s own measure, nothing else had more buzz.

It has nearly Pinterest-level heat around it. That kind of interest is good, but now, with the Austin-based event over, it’s time to take stock of the latest App darling.

If you’re not familiar with Highlight, here’s the rundown: download the free iPhone-only app, sign-in with your Facebook ID and then let Highlight find other users nearby who are either your friends, share your interests or are friends of your friends. By default, it shows you everyone who is in some way connected to your Facebook network via shared interests.

When you are near them — within a 100 meters or so — Highlight sends a push notification and offers the ability to connect (with a message) or highlight (a subtle endorsement). It’s on a competitive plane with apps such as Sonar, Glancee and Banjo (load them all on your phone and it will never stop buzzing). Highlight’s developers call it a sixth sense app. I’d say it’s digital serendipity.

Co-founder and CEO Paul Davison recently sat down with Mashable to talk about what’s next for the growing social network and how he views privacy concerns, including some of the recent difficulties faced by others in the “near-you” space.

Some people have called Highlight creepy because you can suss out connections that happen to be near you, whether or not they want to contacted by you. Davison counters that Highlight offers users complete control. There’s an easy-to-find pause button (I found and used it easily) and though Highlight defaults to “Everyone,” you can damp the app down to only allow connections with Friends of Friends.

Davison is not denying that you do cede some of your privacy if you use Highlight and other social media platforms like it, but he added that you have to weigh the social benefits of using Highlight against the cost of giving up a little bit of your privacy. The CEO has more than a few tales of heartwarming, charming and useful interactions enabled by Highlight — though one he shared with me was rather playful and maybe a tiny bit…er…creepy.

He said he and a friend were at a lunch when they noticed through Highlight that a connection was nearby. They looked around the restaurant and, sure enough, there was the guy, who looked like the guy in his avatar on Highlight. He was wearing sunglasses, so Davison's friend sent him a message that said, “Nice sunglasses.” The guy saw the note in his Highlight inbox and started searching for who was watching him. Eventually he saw Davison and his friend. They all ended up chatting together (most of Davison’s stories end this way).

It’s a slightly creepy scenario, but Davison told me that, as with most new social technologies, the initial response is, “Whoa, creepy.” Yet, there will always be some who see the potential. Davison thinks his app will spread virally through people who appreciate it and eventually reach those who, at least initially, may not. It’s unlikely, though, that Highlight will stand still and wait for people to catch up. Davison talked about some possible future feature enhancements.

Highlight may, for example, eventually start overlaying other contextual information: whether you've been to a place before, whether it's daytime or nighttime (are you heading into work or heading home), whether you commuting on a train or driving to work, or whether you in a supermarket or in a bar. Depending on your activities, the Highlight information could be different. None of this is happening right now, but when it does, it could radically change the way we think about location-based platforms.

It occurred to me that, even in its current incarnation, Highlight is collecting a fair amount of information about your locations and interactions (who you were near yesterday, today, now and where you were throughout the day), and I reminded Davison about the trouble Path ran into when the world learned it was holding onto too much address book data. He told me that, right now, the information Highlight learns is on the startup's servers, but quickly added that Highlight has a privacy policy that spells out exactly what Highlight can and can’t do with the data. “Our top priority is to earn users’ trust. We err more on the conservative side,” Davison said.

With all this data about people, interests and very local information, I wondered what Highlight might do with it all in the future. Is there a hyper-local, group-based deal-play in the works? Davison said no. “For us, it would be a defocusing….Fundamentally the only thing we care about is the people.”

Highlight is free, and there is no obvious revenue play. Davison thinks it’s all about critical mass. He told me there’s tremendous value in a platform that can give you a “sixth sense” about the world around you. Wouldn’t a recruiter love to learn that a viable job candidate is right nearby? “Isn’t that valuable?” Davison asked me. He also said that finding a potential love interest or even an app developer very near you (and ones that you have some sort of connection to) could be valuable, as well. That’s not exactly a clear strategy for revenue, but for now Davison is happy to work on building that critical mass.

Have you tried Highlight yet? I’ve been using it and am often startled at the connections I’ve made and the random contacts that are closer to me than I might otherwise think. So what about you? Is Highlight creepy or cool? Share it all in the comments.