Cocoa and cacao both come from the same source, which is the Theobroma cacao tree, native to South America. You can also say that this is the chocolate tree also, because the pods which this tree produces contain cacao beans. And cacao beans are where cacao, cocoa, and chocolate come from. Cacao beans are usually fermented for the development of flavour, and dried, before the beans are processed any further.
Cocoa butter is derived from the beans with the application of heat, which separates the fats from the beans. What’s left of the beans after the fat is removed essentially gets turned into cacao powder.
Cacao may taste bitter, but in ancient Mexico, Central America and South America, it was extremely valued, and it was cultivated as food and drink, medicine, and as a currency. The Mayans and Aztecs believed that cacao was the “food of the gods”. The Aztecs believed that cacao was discovered by their god, Quetzalcoatl. Cacao beans were ground up by the natives and mixed with water to produce a drink.
Nowadays you can find cacao nibs at the health food store. Cacao nibs are simply chopped up cacao beans. Nibs are wonderful in that they are not very processed and therefore most of the nutrients are retained. When you buy cacao nibs, you are not getting any sugar with it. With a chocolate taste that is slightly bitter because it is not sweetened at all, the taste of cacao nibs may be an acquired one. You can add cacao nibs to cookies, oatmeal, and other snacks.
Cacao powder is the powder of cacao bean solids after their fat content (cocoa butter) has been separated out.
Cocoa powder is cacao that has been heated further. Often it is alkalinized (Dutch-processed) so that it tastes less bitter and can mix more readily with water (increased solubility). Cocoa powder that has not been alkalinized is acidic and more bitter. For baking, most recipes call for cocoa powder, but you can actually use cacao powder and cocoa powder interchangeably. Make sure that the cocoa powder you purchase does not have added ingredients such as sugar or milk.
So how is chocolate made then? Well, with lots of cocoa butter. Cacao nibs are ground up to produce cocoa mass, and if this is heated, it becomes chocolate liquor. Cocoa butter is added to cocoa mass or chocolate liquor to produce chocolate.