From my experience playing at The Bus, I've noticed that Toney - the headline act - plays hundreds of songs and uses a songbook. Most of the folks who sit in in on the jams do not use a songbook, but play the same handful of songs week in and week out. There is nothing wrong with either approach. I've been asked to play at impromptu events enough to recognize that I need to have 5 or 10 "go to" songs I can do without a song a book. I've got 2 or 3 pretty well down now and am working on expanding the list. The songbook is a crutch and I feel very uncomfortable playing without it, even though I might have played the same tune hundreds of times.
I know the words and can sing along to thousands of songs on the radio - That's a whole lot different than being on stage with just you, a mike and a guitar though. All of a sudden you can think of nothing but all of the eyes and ears waiting for you to start!
Rule No. 1 - If it sounds good - it is good!