No actually you want the cutting edge to be on the same side as the stiches. When you create a sheath for tools with an edge, you insert a welt, a strip of leather that sits in the middle. The edge then touches the welt and not the stitches on the inside. It's possible to cut through but it's not likely.

Here is an example of me inserting a welt.

https://lemmy.world/post/41423023

The last image in the post is an example of a welt. When it's all glued together you then stitch through all the layers.

The mistake I made was creating a sheath that I didn't like and instead of recreating it from stratch I reprofiled the design. This was basically just making the oringal smaller. When I did this and tried to restitch, my pricking chisels wouldn't stay straight. So the exit stitch line was very wavy. This can happen if the leather is very thick or very soft.

That's why, in the photo, you only see stitches at the begining and end of the sheath. It's all glued and this type of sheath wont expereince any forces that will make it fall apart. If it does I can just make another one.