Space doesn't only mean the area you physically inhabit in combat
An ogre isn't 10 feet tall by 10 feet wide, they simply command a 10 X 10 combat square area. It would have a penalty to Dex moving through a 5 foot wide square because it can't effectively dodge when the walls are brushing up on it's sides.
This is the same for Medium and Small creatures, who command a 5 X 5 square. They don't command that area because they're that big, they command it because they're actively engaged in combat inside of it and moving within it.
Basically, you've equated combat squares with obstacles to movement in general.
For example: A space large enough for a medium creature to move freely through would be a standard door. However an ogre would need to squeeze through because they're wider and taller than a standard door.
So when you're looking at a medium creature squeezing through a small creatures opening, it's akin to an average person trying to move through a crawl space. While the small creature would be able to do it easily, the medium creature would need to squeeze.
For example, I ran a game with a bunch of small creatures pestering the party and retreating to bolt holes with an opening that would only accommodate small creatures. That means the opening isn't 5 feet wide. By squeezing rules, a party member of medium size could have traversed the tunnels, albeit slowly and at significant disadvantage. Whereas the enemies could freely move and attack using the tunnels for cover and being an extreme and persistent annoyance.
First, darkness does not make 'all characters "hidden"'. Taking the Hide action makes you hidden and only to those whose passive Wisdom (Perception) is less than your Dexterity (Stealth) check. Being in darkness creates the prerequisite for hiding: being unable to be seen clearly but you are not hidden until you Hide.
For the circumstances you describe, everyone knows where everybody is. Everyone who can't see gives advantage on attacks against them and disadvantage on attacks they make. For the blind attacking the blind this cancels out - it only makes a difference when the sighted attack the blind or vice versa.
Best Answer
Sure, but...
First of all, you are totally correct that RAW, a small creature cannot move through a hostile tiny one's space. As I mentioned elsewhere, some DMs may decide that this rule doesn't apply to all tiny creatures, but RAW this is accurate.
There is a slight complication: tiny creatures only control a 2.5 square foot of space in combat (PHB, p. 191), and you need to keep the goblin 5' or more away from your space.
Still, if you are using the rules for movement on a grid, a DM would probably consider the entire square to be occupied by the sprite's space (as there are no clear rules on how decide the sprite's location within the square). And if not, you could place the sprites like so (orange is sprite's space, green is you).
Why this tactic is even better than you think
You wouldn't just be safe from small enemies using this tactic, but larger ones as well (as long as they have a range of 5' or less). Note that the rules on stopping your movement in another creature's space means it is against the rules for a creature to move into a creature's space, attack (anything), and move away regardless of the size of either creature. So your ring of sprites would protect you from melee attacks from larger creatures as well.
Why this tactic isn't so good
Invisibility doesn't make you immune to ranged attacks. If enemies know where you are (which they will unless you Hide, and even then they might be able to guess if you're surrounded by a ring of sprites) they can target you with disadvantage.
Most tiny creatures (like sprites or fairies) have only 1 or 2 hit points, and not great AC (e.g. 15). At best, you'd be warding off a couple of attacks with this tactic before enemies can swarm you again. Fewer if any of your foes can deal area-of-effect damage (e.g. cast shatter).
You're using up two 4th level spell slots for this tactic (conjure woodland beings and greater invisibility), both of which require concentration and thus can't be cast by the same person, and both of which require an Action to cast. Many spells can get you out of melee range (flight, spider climb, blink) or effectively cut off access to you (wall of fire, spirit guardians) for much fewer resources than this. Given the defensive boost you'll likely get getting (only warding off one or two attacks from the goblins), you'd probably be better off doing nothing for your defense, but casting shield if an attack gets through. The +5 to your AC will almost be as good a defensive boost as this tactic, and for far fewer resources, and it won't restrict your actions at all during your turn.