Muslin is cotton woven in an open, loose weave. That weave is what makes it breathable and quick drying, and it's also why it softens more with every wash. Loose weaves like this can shrink a bit the first couple of times they get wet, as the fibers relax and settle. It's a normal part of how the fabric behaves, not a flaw.
Our clothes are double layer muslin cotton, and we pre-wash every piece before it ships, so it already arrives soft and most of the shrinking has already happened by the time it reaches you. To keep it that way, wash cold on a gentle cycle and either tumble dry on low or hang it to dry. Skip fabric softener and skip high heat, both can be harder on the fibers and work against the fabric over time.
You'll probably notice some creasing after washing, that's normal for muslin and part of its character, not a sign anything went wrong. The seams are flat and sewn to hold up to regular washing, and the dyes are chosen to be safe for kids' clothes without needing harsh finishes. If you follow the cold wash, low heat routine, you shouldn't see noticeable shrinkage wash after wash.