The yeast two-hybrid system is based on a hallmark feature of eukaryotic transcription factors: these proteins consist of a DNA binding domain (DBD) which recognizes and binds to a defined promoter sequence upstream of a gene and an activation domain (AD) which interacts with the RNA polymerase II complex. The DBD positions the transcription factor upstream of its target gene and the AD then recruits the RNA polymerase II complex to the start of the gene, thereby activating its transcription.

When the DBD and the AD are expressed as separate polypeptides, the function of the transcription factor is lost: the DBD still binds to its cognate promoter sequence but is unable to activate transcription. The AD can still interact with the RNA polymerase II complex, but since it is not located near the gene anymore, no transcriptional activation is taking place.

The yeast two-hybrid system takes advantage of the modular setup of a transcription factor.

In the first step, a cDNA encoding your protein of interest is cloned into a bait vector, creating a fusion of the DBD and your protein of interest. This fusion protein (termed the bait) translocates to the nucleus of the yeast cell and binds to the promoter located upstream of a reporter gene.

As this bait lacks an activation domain, no activation of the downstream reporter genes takes place.

A second cDNA encoding an interacting ptotein (or a library of cDNAs encoding an entire collection of different potential interactors) is cloned into a prey vector, creating a fusion of the AD and the interacting protein. The fusion protein (termed the prey) has the potential to activate yeast genes due to the presence of the AD but is unable to so since it is not located near a reporter gene.

Finally, if bait and prey interact, the AD is recruited to a reporter gene, creating a hybrid transcription factor. The downstream reporter gene, for example an auxotrophic marker such as HIS3 or ADE2 or a color marker like lacZ, is transcribed, resulting in histidine or adenine prototrophy (cells expressing HIS3 or ADE2 are able to grow on selective medium lacking the amino acid histidine or the metabolite adenine, respectively) or blue coloration of the yeast cells.

Thus, the interaction of two proteins is measured by the reconstitution of a hybrid transcription factor and the consequent activation of a set of specific reporter genes. The power of the yeast two-hybrid system lies in this combined approach since growth selection enables sampling of highly complex cDNA libraries encoding millions of potential binding partners: only those clones which encode an interacting protein survive growth selection are analysed further using the convenient color assay.