Yup, that’s a fairly common problem with live sponges in the aquarium. They are filter feeders that typically feed on very small particles such as bacteria and other microbes, and there is simply not enough suitable food for them in most standard aquarium systems. Live sponges do best in large, well-established reef systems with good flow and no protein skimming.
It would appear that your shrinking sponge is simply not getting enough to eat and therefore losing mass as a result. This in itself is not harmful to your seahorses or the other aquarium inhabitants, but should the sponge expire, it could present a threat due to deteriorating water quality and/or the release of toxins into the water as it disintegrates. So it’s generally a good precaution to remove a live sponge when it begins to dwindle away.
That doesn’t mean that your seahorses have to do without sponges, however, Carrie. The latest generation of artificial sponges are so lifelike the seahorses can’t seem to tell the difference. They are cast from molds of actual sponges and are very detailed and realistic. They are made from polyurethane, which gives them a flexible, resilient texture that’s very similar to the living sponges and they are therefore just as attractive to the seahorses as hitching posts. The synthetic sponges are available in a variety of bright colors such as yellow, orange, purple, blue, and red. So I would find myself a colorful artificial tube sponge or finger sponge or tree sponge or two to replace your shrinking specimens if I were you, Carrie.
Best of luck with your seahorse tank and it’s decor, Carrie!