Sponges and water are used to wet down the leather when ready to tool and work with the leather. Usually, the leather is "cased" first to make it easy to work with. A damp sponge is best used to dampen overly dry areas after a while of working.
Casing: To wet or soak a piece of leather in water causing the leather fibers to expand. When allowed to dry on the surface, the leather is ideal for tooling and working with.
I also like to use a mixture of water with a few drops of "Joy" dish soap which gives the leather an extra "glide" that helps when carving with the knife.