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The federated model is a temporary solution, as a workaround due to the lack of native support in Bitcoin Testnet. Once the Bitcoin network itself can validate the SPV proofs from the sidechain, this model will be replaced with a completely decentralized one.

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What's the incentive for people to merge mine this? Namecoin issues its own currency, and it only has a third of the hashrate of Bitcoin. If this sidechain follows that example, it seems like it will be much easier to mount 51% attacks and forge proofs.

A sidechain can be made to pay out bitcoin rewards to its miners, but it needs to get the coins from somewhere, as it can't generate them from thin air like the main blockchain. For example, it could get the coins from transaction fees, or demurrage (interest paid from everyone holding coins).

This is arguably a better incentive than altcoin mining since miners would be paid in real bitcoins.

The sidechain doesn't have mining. It has "trusted functionaries". Or so the white paper seems to say.

This is a temporary solution, the whitepaper addresses moving to merged mining (it's not being used in the beginning since sidechains that don't have a lot of hashpower are easily attackable).

This thing has a lot of moving parts.

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