Unless you're using IIS 7, then there is a limitation to what you can do with a URL rewrite. Basically, the URL needs to have a filename with an extension such as default.aspx.
If you have control over your web server, then you can move beyond this limitation by using an ISAPI Filter. I really like IIRF. If you're comfortable changing the core and you want to shorten some of the URLs in DotNetNuke, we created a video and tutorial showing how we were able to make some of these changes using IIRF.
I would encourage you to check into the Ventrian products. I know Scott has done some great work with the News Articles module, which many use for their blog. You can't beat his prices and the News Article module has a lot of features the blog module doesn't have. Scott takes advantage of the fact that while you do have to have a filename and known extension, it really doesn't matter what the filename is. So you can replace the default in default.aspx and have everything-you-ever-wanted-to-know-about-rabbits.aspx. It's not quite what you can get with an ISAPI filter, but it works great in medium trust environments, which is important for the many folks out there running DNN in a shared hosting environment.
Having said all this, I agree wholeheartedly with your point. And no, you're not missing anything, the functionality just isn't there yet, at least not with the blog module. You might want to check at support.dotnetnuke.com to see if anyone has already entered an issue requesting this feature in the blog module. If you want the feature today, then check out the Ventrian News Articles module. Our metaPost module will support the Ventrian News Articles module soon (release coming by the end of this week).
HTH,
Don