Bone Morphogenetic Protein (BMP) patterns the dorsal-ventral (DV) embryonic axis in all vertebrates, but it is unknown how cells along the DV axis interpret and translate the gradient of BMP signaling into differential gene activation that will give rise to distinct cell fates. To determine the mechanism of BMP morphogen interpretation in the zebrafish gastrula, we identified 57 genes that are directly activated by BMP signaling. By using Seurat analysis of single-cell RNA sequencing (scRNA-seq) data, we found that these genes are expressed in at least 3 distinct DV domains of the embryo. We distinguished between 3 models of BMP signal interpretation in which cells activate distinct gene expression through interpretation of thresholds of (1) the BMP signaling gradient slope; (2) the BMP signal duration; or (3) the level of BMP signal activation. We tested these 3 models using quantitative measurements of phosphorylated Smad5 (pSmad5) and by examining the spatial relationship between BMP signaling and activation of different target genes at single-cell resolution across the embryo. We found that BMP signaling gradient slope or BMP exposure duration did not account for the differential target gene expression domains. Instead, we show that cells respond to 3 distinct levels of BMP signaling activity to activate and position target gene expression. Together, we demonstrate that distinct pSmad5 threshold levels activate spatially distinct target genes to pattern the DV axis.