Actually, you have two Red Cap Orandas, not Lionheads. With long-tailed goldfish such as your Orandas if your water parameters go awry you will see it first affect the caudal fins which will either become ragged or red-streaked when water conditions are compromised..
We have two fancy lionheads. One is 4 1/2" and the other is around 3"
Regarding your sponge, it should take years for it to degrade so I doubt that is what's happening--if it's actually a sponge and not some other sort of filter media.