The Yocto Project is an open source project that provides tools and methods for creating custom Linux-based systems for embedded products regardless of CPU architecture. It uses a "layer" approach where components like the build system, core packages, and machine-specific files can be mixed and matched. The speaker demonstrates how to download a Yocto Project release, configure a build, and run the build process to generate root filesystem images and packages for target deployment. Potential applications mentioned include virtualization platforms and specialized subsystems in vehicles.