How to setup assets in multi site where each site should have its own assets?
When you're creating a new local asset volume, you choose a file system path. I use both the site handle and the section handle in the path. For example:

/assets/&lt;SiteHandle&gt;/images/&lt;SectionHandle&gt;


Or, referencing your example (and using 'blog' as a section in your site):

/assets/site1/images/blog


I find that it's important to divide up the assets this way so that if you need to migrate content or backup, it will be much easier to figure out which assets go with which content.

If the sites share images in common (eg. social icons), I usually make a common folder to hold these above the site level in assets:

/assets/common/images


But I ultimately recommend that instead of local storage, you use Amazon S3 Buckets. It's relatively simple to set up and you'll see much better performance from Amazon's CDNs. You can use this same concept outlined for local files on Amazon S3.