How do I use Cacao Nibs in the chocolate making recipe

Cocoa nibs are actually one step upstream in the chocolate making process from both cocoa powder and cocoa butter. They are fragments of the fermented and roasted cocoa bean, before any other processing can occur.

Usually, to get chocolate from nibs - the nibs are ground to a powder, then a fine paste, then keep grinding until it is a liquid (known as chocolate liqueur) which can be pressed to separate the cocoa butter from the solids that become cocoa powder - which are stored more easily, used for different purposes, or combined in different proportions. Add some sugar to the paste for dark chocolate, add some milk powder for milk chocolate - and you have chocolate! In a crude and basic form, of course. There's an article on the overall process, here, though this website here is aimed at serious home chocolate makers and has more information with detailed steps and resources.

This page has some ideas for substituting home-made chocolate liqueur (your nibs ground to liquid paste, recall) into other recipes if that, rather than chocolate bars, was your ultimate goal. Your nib paste (or powder, fragments, even chunks) can be used to add texture to your recipe, depending on how fine you ground them - but you would be substituting for an equal weight of unsweetened baker's chocolate. Add sugar for the right percentage of dark chocolate, and additional milk powder (~6oz per pound from that page, or to taste) if substituting for milk chocolate. Remember to calculate the percentage of cocoa in milk chocolate against the combined measurement of milk powder and sugar. That is pretty much the bulk of ingredients for chocolate, missing only stabilizers (like soy lecithin) or minor flavoring agents (a drop of vanilla, some soured milk, a dash of salt) which some companies might add to make their chocolate stand out.

Trying to substitute for either cocoa powder or cocoa butter specifically would be exceedingly difficult, since they are both included in your nibs, and substituting for the combined mass might not work if your nibs have a different percentage (which depends on the beans themselves, so, tricky).

Of course, commercial chocolate meant for bars is usually also conched (finely ground for silky texture) and tempered (heated for stability). These might be a little trickier to do on a home-made or hobbyist scale - conching in particular takes hours of or even days of fine grinding - but something like an electric wet grinder used in Indian cooking might do the trick, if you already have one or are willing to shell out the cash for just this recipe.

But without that conching, your homemade chocolate will tend to be gritty and rough - which is fine if that's what you're going for, "Mexican-style" chocolate is a thing and you can add coarse sugar crystals to accentuate the texture - just be aware of the difference. Tempering involves bringing your chocolate to specific temperatures to make it more heat stable,and give it a professional sheen and snap - it can be done at home (it is tricky, but doable), or even done without depending on what you're using it for, but again be aware of the difference.