The main appeal of Smallest life is, like VF5FS before it, to create a more dynamic, intense, fast paced, exciting and spectator friendly feel to the game. In my play environment people are playing a lot of games and you cannot afford to bore them with slow pace. Players of other fighters and spectators in general want to see the hype, and they want to see big rewards when players do well and high a launch, combo, or good read for a throw.
I also think its important to test out this stuff before dismissing it, while tournaments are currently (rightly) defaulting to Normal life, we should definitely consider this to address the above concerns with the game's current format.
I specifically played a bunch of Bass on Smallest life and both myself and my opponent did not feel it was overpowered to land high counter throws with him. The round wasn't over instantly, it didn't automatically set up a win, he still has to eke out another setup at least. So far have played about 30 matches with various characters, using 3 rounds per match, and it really feels right. The player I was testing with is also very familiar with each other fighter and strong in both Tekken and VF, and neither of us felt damage was too much or that one player had not enough chances.
Hold damage needs to be watched but felt ok in the context of a more fast past, high damaging match. As the stakes are a little higher, people are also less inclined to risk going for counters and getting thrown or launched for extra damage.
Overall, I am for Smallest life, but I appreciate tournaments should stay on Normal for now. The ideal for me would be TN patch the game, change normal to Smallest (remember Normal used to be 240 life before), and adjust down the hold damage to suit, and remove the other life settings.
They should also make 60 seconds the default timer setting and a number of other tournament friendly tweaks.