True Names

True Names was the science fiction novella which brought Vernor Vinge to prominence in 1981. It was one of the earliest stories to present a fully fleshed-out concept of cyberspace, which would later be central to stories by William Gibson, Neal Stephenson, Melissa Scott and others (and particularly to the cyberpunk genre).

Warning: Wikipedia contains spoilers.

The story follows the progress of a group of disaffected computer wizards who are early adopters of a new full-immersive virtual reality technology. Forming a cabal in this other world, they must keep their true identities secret to avoid dire consequences. However a new "wizard" arrives and begins to obtain recruits for a scheme in which domination of cyberspace is used to obtain power in the real-world. The protagonist is one of the wizards who is forced to ally with their "great adversary", the government of the USA, against the newcomer.

In an epic battle in cyberspace, vast computer resources are commandeered and the characters explore a form of transhumanism, expanding their minds through the machines. The newcomer turns out to be an artificial intelligence program, developed in a government laboratory but neglected after the research was terminated.