We have investigated the fundamental mechanism underlying the hydrogen-induced exfoliation of silicon, using a combination of spectroscopic and microscopic techniques. We have studied the evolution of the internal defect structure as a function of implanted hydrogen concentration and annealing temperature and found that the mechanism consists of a number of essential components in which hydrogen plays a key role. Specifically, we show that the chemical action of hydrogen leads to the formation of (100) and (111) internal surfaces above 400 degrees C via agglomeration of the initial defect structure. In addition, molecular hydrogen is evolved between 200 and 400 degrees C and subsequently traps in the microvoids bounded by the internal surfaces, resulting in the build-up of internal pressure. This, in turn, leads to the observed "blistering" of unconstrained silicon samples, or complete layer transfer for silicon wafers joined to a supporting (handle) wafer which acts as a mechanical "stiffener."