diff --git a/docs/PROVIDER_CAPABILITIES.md b/docs/PROVIDER_CAPABILITIES.md
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+# 🧩 Notification Provider Capability Metadata & Degradation
+
+This document details the provider capability discovery and graceful degradation system for NotifyChain (Issue #708).
+
+---
+
+## 1. Capability Taxonomy
+
+Providers declare their supported feature sets via `NotificationCapability`:
+
+* `rich_formatting`: Markdown syntax (bold, italics, inline code).
+* `embedded_links`: Rich action buttons / hyperlinked titles.
+* `attachments`: Binary media and document attachments.
+* `message_updates`: Live in-place message editing.
+* `threading`: Conversational threading / reply keys.
+* `batching`: Multi-event batch payload processing.
+
+---
+
+## 2. Graceful Degradation Strategy
+
+The core dispatch pipeline is completely decoupled from provider-specific logic. When a rich event is dispatched to a limited destination (e.g. Plain Webhook, SMS):
+
+1. **Markdown is stripped** to readable plaintext.
+2. **Action links are expanded** into raw URLs.
+3. **Attachments are referenced** textually with fallback notices without dropping notification delivery.
diff --git a/listener/src/providers/provider-capabilities.test.ts b/listener/src/providers/provider-capabilities.test.ts
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+++ b/listener/src/providers/provider-capabilities.test.ts
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+import {
+  adaptPayloadForProvider,
+  DISCORD_CAPABILITY_PROFILE,
+  SMS_CAPABILITY_PROFILE,
+  WEBHOOK_CAPABILITY_PROFILE,
+  NotificationCapability,
+} from './provider-capabilities';
+
+describe('Provider Capability Metadata & Graceful Degradation (Issue #708)', () => {
+  const samplePayload = {
+    title: '🚨 Payment Received',
+    body: 'You received 500 XLM from Alice.',
+    markdownContent: '**🚨 Payment Received**\nYou received `500 XLM` from Alice.',
+    actions: [{ label: 'View Transaction', url: 'https://stellar.expert/tx/123' }],
+    attachments: [{ filename: 'receipt.pdf', url: 'https://example.com/receipt.pdf' }],
+  };
+
+  test('renders full rich formatting and embedded links on capable providers (Discord)', () => {
+    const formatted = adaptPayloadForProvider(samplePayload, DISCORD_CAPABILITY_PROFILE);
+
+    expect(formatted.hasDegradedFeatures).toBe(false);
+    expect(formatted.omittedFeatures).toEqual([]);
+    expect(formatted.renderedText).toContain('**🚨 Payment Received**');
+    expect(formatted.renderedText).toContain('[View Transaction](https://stellar.expert/tx/123)');
+  });
+
+  test('gracefully degrades markdown and embeds on plain providers (SMS)', () => {
+    const formatted = adaptPayloadForProvider(samplePayload, SMS_CAPABILITY_PROFILE);
+
+    expect(formatted.hasDegradedFeatures).toBe(true);
+    expect(formatted.omittedFeatures).toContain(NotificationCapability.RICH_FORMATTING);
+    expect(formatted.omittedFeatures).toContain(NotificationCapability.EMBEDDED_LINKS);
+    expect(formatted.omittedFeatures).toContain(NotificationCapability.ATTACHMENTS);
+    expect(formatted.renderedText).not.toContain('**');
+    expect(formatted.renderedText).toContain('View Transaction: https://stellar.expert/tx/123');
+    expect(formatted.renderedText).toContain('Attachments omitted: receipt.pdf');
+  });
+
+  test('preserves generic webhook capabilities without hard dependencies', () => {
+    const formatted = adaptPayloadForProvider(samplePayload, WEBHOOK_CAPABILITY_PROFILE);
+
+    expect(formatted.omittedFeatures).toContain(NotificationCapability.ATTACHMENTS);
+    expect(formatted.renderedText).toContain('**🚨 Payment Received**');
+  });
+});
diff --git a/listener/src/providers/provider-capabilities.ts b/listener/src/providers/provider-capabilities.ts
new file mode 100644
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+++ b/listener/src/providers/provider-capabilities.ts
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+/**
+ * Provider Capability Metadata System (Issue #708)
+ *
+ * Enables notification providers to declare supported capabilities (rich formatting,
+ * embeds, attachments, message updates) and gracefully downgrades unsupported features.
+ */
+
+export enum NotificationCapability {
+  RICH_FORMATTING = 'rich_formatting', // Markdown, bold, italics
+  EMBEDDED_LINKS = 'embedded_links',   // Clickable hyperlink buttons
+  ATTACHMENTS = 'attachments',         // File uploads, image media
+  MESSAGE_UPDATES = 'message_updates', // Editing dispatched notifications
+  THREADING = 'threading',             // Thread/channel reply nesting
+  BATCHING = 'batching',               // Multi-event batch payload delivery
+}
+
+export interface ProviderCapabilities {
+  providerName: string;
+  version: string;
+  supportedCapabilities: Set<NotificationCapability>;
+  maxPayloadBytes: number;
+  maxBatchSize: number;
+}
+
+export interface NotificationPayload {
+  title: string;
+  body: string;
+  markdownContent?: string;
+  attachments?: Array<{ filename: string; url: string }>;
+  actions?: Array<{ label: string; url: string }>;
+}
+
+export interface FormattedNotification {
+  renderedText: string;
+  hasDegradedFeatures: boolean;
+  omittedFeatures: NotificationCapability[];
+}
+
+/**
+ * Standard Capability Profiles for Core Providers
+ */
+export const DISCORD_CAPABILITY_PROFILE: ProviderCapabilities = {
+  providerName: 'Discord',
+  version: '1.0.0',
+  supportedCapabilities: new Set([
+    NotificationCapability.RICH_FORMATTING,
+    NotificationCapability.EMBEDDED_LINKS,
+    NotificationCapability.ATTACHMENTS,
+    NotificationCapability.BATCHING,
+  ]),
+  maxPayloadBytes: 8192,
+  maxBatchSize: 10,
+};
+
+export const WEBHOOK_CAPABILITY_PROFILE: ProviderCapabilities = {
+  providerName: 'GenericWebhook',
+  version: '1.0.0',
+  supportedCapabilities: new Set([
+    NotificationCapability.RICH_FORMATTING,
+    NotificationCapability.BATCHING,
+  ]),
+  maxPayloadBytes: 65536,
+  maxBatchSize: 100,
+};
+
+export const SMS_CAPABILITY_PROFILE: ProviderCapabilities = {
+  providerName: 'SMS',
+  version: '1.0.0',
+  supportedCapabilities: new Set([]), // Plain text only
+  maxPayloadBytes: 160,
+  maxBatchSize: 1,
+};
+
+/**
+ * Adapts and degrades a notification payload according to the destination provider's capabilities.
+ */
+export function adaptPayloadForProvider(
+  payload: NotificationPayload,
+  capabilities: ProviderCapabilities
+): FormattedNotification {
+  const omittedFeatures: NotificationCapability[] = [];
+  let renderedText = '';
+
+  // 1. Formatting
+  if (capabilities.supportedCapabilities.has(NotificationCapability.RICH_FORMATTING)) {
+    renderedText = payload.markdownContent || `**${payload.title}**\n${payload.body}`;
+  } else {
+    // Strip markdown formatting
+    renderedText = `${payload.title}\n${payload.body}`
+      .replace(/\*\*(.*?)\*\*/g, '$1')
+      .replace(/\*(.*?)\*/g, '$1')
+      .replace(/`([^`]+)`/g, '$1');
+    if (payload.markdownContent) {
+      omittedFeatures.push(NotificationCapability.RICH_FORMATTING);
+    }
+  }
+
+  // 2. Action links
+  if (payload.actions && payload.actions.length > 0) {
+    if (capabilities.supportedCapabilities.has(NotificationCapability.EMBEDDED_LINKS)) {
+      const linkList = payload.actions.map((a) => `[${a.label}](${a.url})`).join(' | ');
+      renderedText += `\n\n${linkList}`;
+    } else {
+      // Append raw URLs
+      const rawUrls = payload.actions.map((a) => `${a.label}: ${a.url}`).join('\n');
+      renderedText += `\n\n${rawUrls}`;
+      omittedFeatures.push(NotificationCapability.EMBEDDED_LINKS);
+    }
+  }
+
+  // 3. Attachments
+  if (payload.attachments && payload.attachments.length > 0) {
+    if (!capabilities.supportedCapabilities.has(NotificationCapability.ATTACHMENTS)) {
+      omittedFeatures.push(NotificationCapability.ATTACHMENTS);
+      renderedText += `\n(Attachments omitted: ${payload.attachments.map((a) => a.filename).join(', ')})`;
+    }
+  }
+
+  return {
+    renderedText,
+    hasDegradedFeatures: omittedFeatures.length > 0,
+    omittedFeatures,
+  };
+}