AbstractDuring neocortical development, network activity undergoes a dramatic transition from largely synchronized, so-called cluster activity, to a relatively sparse pattern around the time of eye-opening in rodents. Biophysical mechanisms underlying this sparsification phenomenon remain poorly understood. Here, we present a dynamic systems modeling study of a developing neural network that provides the first mechanistic insights into sparsification. We find that the rest state of immature networks is strongly affected by the dynamics of a transient, unstable state hidden in their firing activities, allowing these networks to either be silent or generate large cluster activity. We address how, and which, specific developmental changes in neuronal and synaptic parameters drive sparsification. We also reveal how these changes refine the information processing capabilities of an in vivo developing network, mainly by showing a developmental reduction in the instability of network’s firing activity, an effective availability of inhibition-stabilized states, and an emergence of spontaneous attractors and state transition mechanisms. Furthermore, we demonstrate the key role of GABAergic transmission and depressing glutamatergic synapses in governing the spatiotemporal evolution of cluster activity. These results, by providing a strong link between experimental observations and model behavior, suggest how adult sparse coding networks may emerge developmentally.