It seems that everyone puts them on top of the panel these days. Why?
They go UNDER it. There is a recession in many joystick bodies to accommodate that.
Putting them on top eventually scratches the finish on the panel.
A lot of joystick don't have such a recessand their top is a flat metal plate
This might explain why it is common to put them on top today. Of course, a few washers between the plate and top would make it possible to put the dustwasher inside, hence the flat plates don't mean it's meants to go on top. So I went and I looked at old ads on google, getting to see the cabinet new and as intended without any chance of someone restoring it with the dustwasher on top. PacMan and StreetFighter 2 have holes visible around the joysticks, that would make you correct.
However, I think it's really a question of taste when it comes to arcade sticks.
I prefer on the outside and the main reason is that I prefer the look of a big coin around my joystick then a big hole. Objectively, neither wins.
Scratch-wise: Yes on the outside it will eventually leave a mark slightly larger than the washer. However, with the hole, its rim is unprotected and it is a weak point if it's painted, a weak point to cheap away at some kind of varnish, particle falling in the hole might scratch it when pushed out and the perfect circle might end up looking a bit jagged. Debatable, personally I prefer to see a nice perfect discolered ring around my big coin, I prefer the "well" used look to the "scratched" look. But this is really a question of taste and neither win.
Water protection: If you spill a drink in the hole, it will stay in the hole and slowly seep in until you find a cloth or sponge to get the liquid out. If the dustwasher is on top, it will splash away with just a few droplet going down the shaft (which also happen with the washer inside). A win for washer on the outside.
Dimwit protection: If it's on the outside, dimwits can lift it and get crap inside. You don't want this in an arcade. Win for inside.
Vandalism/theft protection: If it's on the outside, it's easier to grab and destroy. It's also easier for people stealing the ball to get away with the washer too. Again you don't want this in an arcade so it's a win for inside.
If you make an arcade stick for yourself, your friends(which will be supervised in your living room) or to sell to someone else, dimwits, vandals and thieves shouldn't be a problem. Then it's really becomes a question of taste and the intended way isn't more or less relevant.