Bone Morphogenetic Protein (BMP) patterns the dorsoventral (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 specify distinct cell fates. To determine the mechanism by which BMP signaling provides positional information to cells across the DV axis in the zebrafish embryo, we identified the genes that are directly regulated by BMP signaling during gastrulation. We identified 57 genes that are directly activated and 15 genes directly repressed by BMP signaling. By using Seurat analysis of single-cell RNA-seq data, we found that genes activated by BMP signaling are expressed in at least three distinct DV domains of the embryo. The expression boundaries of genes expressed in different domains correlate with both distinct BMP signaling levels and gradient slopes. The gradient is also highly dynamic during gradient formation from mid-blastula to early-gastrula stages, exposing cells to different signaling durations during gastrulation. The goal of this work is to distinguish between three models of BMP signal interpretation in which cells activate distinct gene expression through interpretation of thresholds of: 1. the BMP signaling gradient slope, 2. BMP signal duration, or 3. the level of BMP signal activation. We tested these three models using quantitative measurements of phospho-Smad5 and by examining the spatial relationship between BMP signaling and activation of different target genes at single cell resolution across the embryo. We utilized mutants that have a modified phospho-Smad5 gradient shape and measured corresponding shifts in target gene expression to determine if the gradient slope provides positional information. To address the role of signal duration to pattern ventral cell fates, we tested the requirement of BMP ligand exposure to activate target gene expression. 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 three distinct levels of BMP signaling activity to activate and position target gene expression. Together, we demonstrate that distinct phospho-Smad5 threshold levels activate spatially-distinct target genes to pattern the DV axis.