The airstone doesn't do you any good if it just sits above the sponge like that. You need to bore a hole into the sponge, then ideally get some tubing of the appropriate diameter to fit into the hole snugly (maybe an inch or so in diameter would be good). If the hole goes all the way through the sponge, then you will want to plug the end of the large tubing so that water doesn't enter that way. Drill a bunch of holes in the section of tubing that are within the sponge; then drop the airstone inside the large tubing and secure it so that it doesn't come out.
The idea is for the air bubbles to create an airlift which sucks water into the sponge, through the holes into the large tube. The air bubbles will draw that water upwards and release it back into the tank, forcing more water to flow through the sponge and into the tube. The water will be filtered mechanically by the sponge, and the constant flow of aerated water will encourage the growth of bacteria throughout the sponge which will provide your biological filtration. Hard to describe, very easy to do. Google "sponge filter" and I'm sure you will find pictures that make it clear.
