A satoshi, often shortened to "sat", is the smallest unit of bitcoin recorded on the blockchain. One bitcoin equals 100,000,000 satoshis, so one sat is 0.00000001 BTC.
Why so small?
Bitcoin's supply is capped at just under 21 million coins. If the price of one coin is high, everyday payments need small units. Dividing each coin into a hundred million parts gives the system just under 2.1 quadrillion sats in total. That is plenty for small purchases even if one bitcoin becomes very valuable.
How the software sees it
Under the hood, Bitcoin does not use decimals at all. Every amount inside a transaction, every UTXO, is stored as a whole number of satoshis. "0.5 BTC" is just a friendly way to display 50,000,000 sats. Using whole numbers avoids rounding errors.
Even smaller: millisats
The Lightning Network can track amounts in millisatoshis, thousandths of a sat, inside payment channels. When a channel closes and settles on-chain, amounts are rounded to whole sats, because the base layer cannot record anything smaller.
Where the name comes from
The unit is named after Satoshi Nakamoto, the pseudonymous creator who published the white paper in 2008 and stopped communicating publicly in 2011 (last known emails in April 2011). Nobody knows for certain who Satoshi is. The name for the unit was proposed by users on the Bitcointalk forum around 2010 and became the standard term.
"Stacking sats"
Many people now think in sats instead of whole coins. Saying "I bought 20,000 sats" feels more natural than "0.0002 BTC", and it reminds newcomers that you do not need to buy a whole bitcoin. Some wallets now show balances in sats by default, and transaction fees are usually quoted in sats per virtual byte.