Issues like this are commonly due to pH issues , nutrient over usage as well as underwatering and overwatering and heat stress. Hard water is notorious for fucking up developing seedlings too due to the extreme high ph usually found with it .
put it in a bigger pot and stop dumping water in it..........sucks going to a bigger pot so soon but it looks soaked and packed down......or just let it go maybe throw some dry soil on top..........if you transplant be careful your mud ball doesnt break apart