I think your idea of just putting a cotton wrap or some muslin as a sheet would be fine. I am not doing top sheets for our bubs as ours will just be wrapped up as well so I dont see the need for a top sheet. You could also use a cot top sheet folded up and tucked in around the hammock mattress as a bottome sheet.

Someone in my BB group suggested using the terry towelling cloth nappie squares as a mattress protector for a small space as well which I thought was a great idea.