Where Does "Martial Arts" Come From?
I'm from a camp that believes that martial arts is just that: study and practice of battlefield tactics. Think military. So, modern martial arts would involve throwing hand grenades, bivouac, first aid, placing mines, using a LAW, and all of the support behind such things, like command structure, fitness, eating, hygiene and sanitation, and religion. Many "martial arts" we see today were just that long ago. Karate and Kung Fu are good examples - but they are now only a snapshot in time. Today's practice of strict Okinawan Karate, for example, is practiced only from historical context, not applicable modern context. As such, there is very little modern military application. The styles were not watered down, they simply didn't adapt to new military practices.
Taekwondo was built for a small, singular purpose: to survive on the battlefield. Historically, it would come close to a martial art, but only a portion of it. Taekwondo does not (and never did) concern itself with weapons, first aid, religion, etc. But there are shadows of martial similarities: there is a command structure in many taekwondo schools - some are very strict. Lots of "Yes, SIR!" in most schools. Religion may be out, but there are several character-building tenets built within. (Chung Do Kwan Taekwondo, for example, has an oath that is recited before each class. This oath is not unlike the Boy Scout's scout oath and scout law. It may not be religious, but it is all about character building.) And Taekwondo aims to keep the body physically fit, just as a soldier would expect to do the same on the battlefield.
But today, only the military practices true martial arts. The rest of us practice a (very) cherry-picked subset of martial arts. On a broad front, we have all adopted the combat fighting parts. From there, we diverge into grappling only, striking only, weapons only, wellness only, and hybrids. Some styles are for the individual, while others are for a team, and yet others are suitable for a family (eg, ATA Taekwondo).
Is There a Difference Between 'Less Effective' and 'Adapted'?
That is where your answer lies: that which we often refer to as "martial arts" hasn't necessarily been reduced in effectiveness, they simply adapted to today's purposes. None of them are effective on the battlefield, so in that sense, yes, they've all been made less effective for the battlefield. So maybe, it begs a question to your question "what do you mean by effectiveness?"
If by effective, you mean, can you use it on the battlefield? No, there is no combat fighting system which is suitable for the battlefield. Generally, the sport styles teach one-on-one only, with no weapons, and a limited set of techniques and targets that can be used. The self-defense styles teach only survival against non-military adversaries with knives and fists, although some will dabble in gun disabling. Today's wars are fought with long range projectile weapons; aerial combat; computer, chemical, biological, and nuclear warfare; and other tactics. No style of modern "martial arts" covers any of this in any dojang or dojo.
So the only possible definition you could possibly infer "effectiveness" would have to be either sport, self-defense, or personal wellness.
As to sport, each style has evolved into what it is today because of the nuances of sport. Taekwondo moved from the battlefield into street shops teaching fighting skills, and evolved into competition. You see the evolution as some techniques (like the crescent kick) are falling out of favor, while new techniques (like aerial spinning kicks) are introduced. Technology and customs change, too: there's specially trained referees, specialized mats, e-scoring systems, new forms developed for the sole purpose of competition. So, I would say effectiveness in sport has improved: each style is a niche sport, and every evolutionary change is made to make the sport more effective for that sport.
As to self-defense, this is where the arguments begin. It's also what most people are referring to, or infer, when they use or hear the phrase "effective". But reference to self-defense can be misplaced. Taekwondo (today) is a sport, it is not meant for self-defense. Like boxing, wrestling, BJJ, muay thai - there is only single-opponent, no weapons, and controlled environment practice. Can you use any of these styles for self-defense? Of course you can, just like you can use a wrench to hammer in a nail. But you might as well lump football and rugby players here, too: they may not be fighting, but they sure know how to take someone down - and sometimes, that's just what you need. But they will all struggle hard against someone with a weapon, or against multiple someones.
And as to wellness... well, Taekwondo is horrible. Yes, there's lots of cardio in most schools. But really, the risk to the knees and ankles isn't worth it - you'd be better off in a gym. Many places do not warm up or stretch a student properly. So use a hammer (ie, go to a gym), not a wrench, because it's more versatile and can handle most kinds of things needing hammering. Aikido is also horrible. Many places won't have your pulse elevating that much, but there is good stretching of the spine and neck. But if that's what you want, maybe best to go to a gym for the cardio and a chiropractor for the neck and spine. Again, use a hammer, not a wrench. MMA? Good for cardio, good for overall body workout. But like all other martial styles, it's not there for your wellness, it's there for competition. Use a hammer.
Can a Style Both Adapt and be Made Less Effective?
You brought up another point. Watered down techniques (ie, "made less effective") for the purpose of bringing the stuff into schools. Jigoro Kano and Ginchen Funakoshi were noted for doing just this. Schools can't have their students running around putting people in rear naked chokes, or throwing each other, now, can they? They need to come back the next day for more learning, and not in bandages and casts. Yes, the styles' techniques were "refocused". I'm shying away from saying "watered down" because in truth, nothing changed - only the explanations changed. What became watered down was when those kids - not having learned anything else - grew up and themselves became instructors. A good example is Gen Choi when he developed his version of Taekwondo. You can read the absurdities of kata application when he wrote and described his new kata (and called them hyung and tul). Even the pushers and movers of the opposing trending Taekwondo style (what would eventually become Kukkiwon, aka WTF Taekwondo), there, the textbook has just as laughable applications for poomsae (kata).
The water down was evolutionary: those kids being taught that spearhands were pokes to the stomach, and chambering hands were readying for a punch, and the like, they grew up to be instructors themselves, and they knew no better. THAT is where the water down happened. No one said "let's take this out of the style because it's too dangerous", they said "Let's rename this technique so it won't seem so dangerous and they won't go around using the technique as it was intended". A spearhand to the belly is benign compared to the throw it is meant to be.
Can Neglect Make a Style Less Effective?
More water down: read Choi's encyclopedia, or Kukkiwon's textbook (although, I will add that the newer edition of the Kukkiwon textbook shows more competency in applications than either its predecessor or its ITF compliment). The water down occurred when an authority (Choi, Kukkiwon) passed on misinformation - the same information the kids were taught. In bolstering this, neither side made any attempt to include application in their curricula. There is neither official ITF or Kukkiwon/WTF requirement to advance in rank by showing competency in self-defense, nor knowledge of application in their poomsae/hyung except to demonstrate proficiency in performing the hyung's movements only. This stands in contrast to good Karate schools (notably from Okinawan heritage) where demonstration of application is the requisite.
If you were a student of ITF or Kukkiwon/WTF Taekwondo, and steadfastly subscribed to the tenets of application as described in the styles' respective tomes without question, then you yourself are contributing to the watering down of the style. You could, of course, be studying it for the historical context - many ITF students do this - but I don't think Choi would want students to not grow intellectually and technically by not studying more about the style outside the encyclopedia. Whether either author placed the absurd bunhae as a means for the reader to do some real research is debatable. The books are, after all, a definitive reference for their respective styles. So to me, the authors take some blame for this watering down by way of students adhering to dogma and not thinking for themselves.
But did Choi and Kukkiwon do it deliberately? Nothing about the character of the founders suggests so (indeed, Dr Lee Kyu Hyung has a doctorate in physical education, has authored several books (including the textbook), and served as president in several organizations, and is highly regarded for his character and achievements. He didn't found the style, but he is instrumental in its evolution). And as to Choi, he had a lot of faults, but deliberately watering down his style would not be one of them. So it stands to reason that the inclusion of strange bunhae was meant to be what the Japanese call "omote bunkai" - or "obvious bunkai", and left as an exercise for "better reading". That students were not encouraged to do that better reading, that could be blamed on Choi.
There are those who completely subscribe to the limited bunkai (bunhae) in Taekwondo's poomsae as described in their tomes, and refuse to consider all other possibilities. I know, I occasionally work out with some of them, and occasionally compete against them. They are, or will be, instructors themselves, and they will perpetuate that watering down of the style. That there is deliberately watering down the style.
It is curious to me that Kukkiwon - a predominantly sport-oriented style - has updated their textbook to show more realistic self-defense applications for their poomsae (and as well, gone deeper into competition techniques). Of course, Choi is dead, but none of the "official" ITF federations has done anything about adjusting or clarifying Choi's bunhae either.
For the record, the book you mention is an excellent book. They focus on the ITF style of Taekwondo (the Chang Hon set of forms). They go into summary detail about real applications for most of the unusual movements in ALL forms. Conversely, Choi's encyclopedia covers only a fraction of the movements in all of the forms, and, what he did cover is not true bunhae - it's awful. Some of it is comical. And as we should know, there are many - dozens - of techniques that can be drawn from any given movement in kata, but this book presents only one. That's a great start, and it shortcuts the research someone familiar with ITF Taekwondo, but not Karate, must do in order to find competent applications. For those studying Kukkiwon/WTF Taekwondo, the forms (taeguek, palgwe, or yudanja) there aren't covered, but, there are many similar techniques, and there still exists some value to those practitioners. So it is an excellent start for those Taekwondo-in searching for competent bunhae in their forms.
This book, therefore, serves as an excellent first step in de-watering down, or revitalizing the style's effectiveness for self-defense.