Mike Arrington of TechCrunch is correct in saying that GPS could be one of the killer apps of social networking, and that the heavyweights such as MySpace and Facebook ignore it at their own peril. Loopt is one of the new "location-based" social networks, which has a very slick app for the iPhone, which hints at this promise -- but doesn't deliver.
The fundamental problem with all these new services is that there is currently no way on the iPhone to broadcast your location, in the background, to an outside server (such as Loopt, Facebook etc.). As mentioned during the initial developer's conference, Apple has so far resisted the idea of background processes, claiming that they place too much of a load on the CPU and battery resources of the phone.
A possible solution, due in September, is called "unified push notification". From what we know, Apple will allow a developer's server to maintain a persistent connection with the iPhone, and pass messages to an app while idle. It's not quite clear whether the phone will be able to pass GPS information back to the server using this technique. If this does happen, programs like Loopt will allow users to broadcast their GPS positions (with approval) to their friends in the background. More likely, we will need to wait for a future SDK enhancement -- possibly in 2009.
Privacy is of course an issue. But right now the big problem with programs like Loopt is simply that the iPhone doen't fully support them. Someday it will, at which point there will be a lot of uses for this type of service.