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Which microbe is the simplest organism depends on your definition of a living organism. If viruses, prions, satellites, nanobes, nanobacteria (non-free-living sub-bacterial organisms) are excluded, the simplest free-living organism known is Mycoplasma genitalium, with a genome of only 580,000 base pairs and 482 protein-coding genes. Mycoplasma genitalium is a tiny parasitic bacteria that lives in the digestive and genital tracts of primates.
By comparison, Carsonella ruddii, an endosymbiotic bacteria that lives in plant lice, has a genome of only 159,662 base pairs, with just 182 genes, the smallest known. However, Carsonella ruddii cannot live on its own, and like a virus, depends on the host to survive. Previously, a thermophile that lives around underwater hot springs, Nanoarchaeum equitans, was thought to be the simplest organism, with a genome 490,885 base pairs long and a size of 400 nanometers.
Mycoplasma genitalium and other "ultramicroscopic" bacteria have diameters in the ballpark of 200-300 nanometers, smaller than some large viruses. 200 nm is about the limits of a conventional light microscope, so an electron microscope or atomic force microscope is necessary to observe these organisms. There may be free-living organisms even smaller than this — so-called nanobacteria or nanobes are around 10 - 20 nanometers in size, although their status as living organisms is controversial. No DNA has yet been successfully extracted from these objects, which may simply be mineral growths. On the other hand, among them may be the world's simplest organism.
Viruses, which cannot reproduce independently, are of course smaller and simpler than bacteria. Some of the smallest RNA viruses, retroviruses such as the Rous sarcoma virus, have genomes 3,500 base pairs in length, a diameter of about 80 nm, and only possess just four genes. The smallest DNA viruses have a smaller size (18-26 nm) but larger genomes, around 5,000 base pairs. Bacteria and viruses with tiny genomes tend to have a high ratio of protein coding genes (95-98%), in comparison to larger genomes like the human genome, where only 1.5% of genes code for proteins.
In an interesting twist on the simplest organism story, scientist Craig Venter Nobel Prize winner Hamilton Smith, working at the J. Craig Venter Institute are attempting to create an even simpler organism, Mycoplasma laboratorium, which, if successful, will also be the first example of synthetic life. Taking a Mycoplasma genitalium as a starting point, the team randomly knocks out genes and observes the resulting organism for signs of life. Venter believes that 100 of the 482 protein-coding genes in Mycoplasma are redundant, and seeks to synthesize a novel genome from scratch containing only 382 genes, then inject it into a gutted Mycoplasma genitalium, which would then reanimate, Frankenstein-style. This is called the Minimal Genome Project. The goal is to use the simplest organism to produce large amounts of hydrogen for renewable fuel.