Being that this is a human world: if you cross the line far enough in someone's face, you shouldn't be shocked if it gets physical - regardless of where it happens. This is a lesson most of us learn by high school.
So I get Will Smith's reaction. But, on the surface - if Rock really didn't know about Jada's condition, which I find highly unlikely, not to mention his Good Hair documentary - then the joke is about a fashion choice and therefore, totally acceptable, regardless of how tasteless it might have been - which makes Smith's reaction certifiably crazy. In fact, even if the joke was a mean-spirited attack, Smith's reaction is still nuts. It's the f*cking Oscars. Save that sh*t for the parking lot Red Carpet.
At the end of the day, I have to agree that the show much go on. And while I understand Smith's reaction, and the long running feud between the three stars, understanding a thing is not the same as condoning it. I agree that Rock's joke would have been judged by the court of public opinion, which is to say that it wouldn't have mattered at all by the end of the week. Smith's confrontation, on the other hand, is going to have lasting consequences far beyond this isolated event. Given the circumstances, I think everyone can agree that Smith's reaction was, to say the least, unnecessary and extremely bad form.