diff --git a/agentwatch/orchestration/discount.py b/agentwatch/orchestration/discount.py
new file mode 100644
index 00000000..18f4f8b7
--- /dev/null
+++ b/agentwatch/orchestration/discount.py
@@ -0,0 +1,225 @@
+"""
+MAG-010 — Confidence Discount Propagation Across Multi-Agent DAGs.
+
+When an upstream agent produces output with low confidence or high
+hallucination risk, a discount factor is computed per DAG edge and
+propagated downstream via topological traversal. The cumulative
+discount is applied to downstream confidence scores so that
+untrusted inputs are reflected in every dependent agent's evaluation.
+"""
+
+from __future__ import annotations
+
+import logging
+from collections import deque
+from dataclasses import dataclass, field
+
+from agentwatch.orchestration.dag import InterAgentDAG
+from agentwatch.orchestration.trust import InterAgentTrust
+from agentwatch.reasoning.hallucination import HallucinationClassifier, HallucinationRisk
+from agentwatch.scoring.confidence import ConfidenceScorer, ScoringResult
+
+logger = logging.getLogger(__name__)
+
+DISCOUNT_HIGH_RISK = 0.40
+DISCOUNT_MEDIUM_RISK = 0.20
+DISCOUNT_LOW_RISK = 0.0
+DISCOUNT_MIN_TRUST = 0.30
+DISCOUNT_WEIGHT_TRUST = 0.5
+DISCOUNT_WEIGHT_HALLUCINATION = 0.5
+
+
+@dataclass
+class DiscountEdge:
+    src: str
+    dst: str
+    discount: float = 0.0
+    reasons: list[str] = field(default_factory=list)
+
+
+@dataclass
+class DiscountReport:
+    origin_node: str
+    origin_agent: str
+    origin_confidence: float
+    discounts: list[DiscountEdge] = field(default_factory=list)
+    depth: int = 0
+
+    @property
+    def max_downstream_discount(self) -> float:
+        if not self.discounts:
+            return 0.0
+        return max(e.discount for e in self.discounts)
+
+
+class ConfidenceDiscountPropagator:
+    def __init__(
+        self,
+        trust: InterAgentTrust | None = None,
+        hallucination_classifier: HallucinationClassifier | None = None,
+        confidence_scorer: ConfidenceScorer | None = None,
+    ):
+        self._trust = trust or InterAgentTrust()
+        self._hallucination_classifier = hallucination_classifier or HallucinationClassifier()
+        self._confidence_scorer = confidence_scorer or ConfidenceScorer()
+
+    def _trust_discount(self, src: str, dst: str) -> tuple[float, str]:
+        """Compute discount from trust score — low trust → high discount."""
+        score = self._trust.score(src)
+        edges = self._trust.edges()
+        pair_edges = [e for e in edges if e.src == src and e.dst == dst]
+        pair_score = pair_edges[0].score if pair_edges else score
+
+        if pair_score <= 0.3:
+            return DISCOUNT_MIN_TRUST, f"trust_score_{pair_score:.2f}"
+        if pair_score <= 0.5:
+            return 0.15, f"trust_score_{pair_score:.2f}"
+        return 0.0, ""
+
+    def _hallucination_discount(self, agent_id: str) -> tuple[float, str]:
+        """
+        Estimate hallucination risk at the agent level.
+        Uses the classifier's per-step risk; if no sessions exist,
+        returns low risk.
+        """
+        if not self._hallucination_classifier.session_flags:
+            return 0.0, "no_hallucination_data"
+        flags = self._hallucination_classifier.session_flags.get(agent_id, [])
+        if not flags:
+            return 0.0, "no_hallucination_flags"
+        max_risk = max(f.risk for f in flags)
+        mapping = {
+            HallucinationRisk.HIGH: DISCOUNT_HIGH_RISK,
+            HallucinationRisk.MEDIUM: DISCOUNT_MEDIUM_RISK,
+            HallucinationRisk.LOW: DISCOUNT_LOW_RISK,
+        }
+        discount = mapping.get(max_risk, 0.0)
+        return discount, f"hallucination_{max_risk.value}"
+
+    def _agent_confidence_discount(self, confidence: ScoringResult | None) -> tuple[float, str]:
+        """Low confidence scores translate to higher discount."""
+        if confidence is None:
+            return 0.0, "no_confidence_data"
+        score = confidence.overall_score
+        if score < 0.3:
+            return DISCOUNT_MIN_TRUST, f"confidence_{score:.2f}"
+        if score < 0.6:
+            return 0.15, f"confidence_{score:.2f}"
+        return 0.0, ""
+
+    def compute_edge_discount(
+        self,
+        src_agent: str,
+        dst_agent: str,
+        src_confidence: ScoringResult | None = None,
+    ) -> tuple[float, list[str]]:
+        """Compute blended discount for a single DAG edge."""
+        reasons: list[str] = []
+
+        trust_discount, trust_reason = self._trust_discount(src_agent, dst_agent)
+        if trust_discount > 0:
+            reasons.append(trust_reason)
+
+        hallucination_discount, hallu_reason = self._hallucination_discount(src_agent)
+        if hallucination_discount > 0:
+            reasons.append(hallu_reason)
+
+        confidence_discount, conf_reason = self._agent_confidence_discount(src_confidence)
+        if confidence_discount > 0:
+            reasons.append(conf_reason)
+
+        blended = (
+            trust_discount * DISCOUNT_WEIGHT_TRUST
+            + max(hallucination_discount, confidence_discount) * DISCOUNT_WEIGHT_HALLUCINATION
+        )
+        blended = min(blended, 0.95)
+        return blended, reasons
+
+    def propagate(
+        self,
+        dag: InterAgentDAG,
+        origin_node: str,
+        origin_agent: str,
+        origin_confidence: float,
+        agent_confidence_map: dict[str, ScoringResult] | None = None,
+    ) -> DiscountReport:
+        """
+        BFS traversal from the origin node through the DAG, computing
+        cumulative discount at each downstream node.
+
+        The cumulative discount at node N is:
+            discount(N) = 1 - prod(1 - discount(edge)) for all edges on path
+
+        Args:
+            dag: The inter-agent causal DAG.
+            origin_node: The node where the low-confidence output originated.
+            origin_agent: The agent that produced the low-confidence output.
+            origin_confidence: The confidence score of the origin (0-1).
+            agent_confidence_map: Optional map of agent_id -> ScoringResult
+                for richer discount computation.
+
+        Returns:
+            A DiscountReport with per-edge discounts.
+        """
+        if origin_node not in dag.nodes:
+            return DiscountReport(
+                origin_node=origin_node,
+                origin_agent=origin_agent,
+                origin_confidence=origin_confidence,
+            )
+
+        out_index: dict[str, list[str]] = {}
+        edge_kind: dict[tuple[str, str], str] = {}
+        for e in dag.edges:
+            out_index.setdefault(e.src, []).append(e.dst)
+            edge_kind[(e.src, e.dst)] = e.kind
+
+        discounts: list[DiscountEdge] = []
+        depth = 0
+        seen = {origin_node}
+        frontier: deque[tuple[str, int, float]] = deque([(origin_node, 0, 1.0)])
+
+        while frontier:
+            node_id, d, cumulative_discount = frontier.popleft()
+            depth = max(depth, d)
+
+            for nxt in out_index.get(node_id, []):
+                src_agent = dag.nodes[node_id].agent_id
+                dst_agent = dag.nodes[nxt].agent_id
+                src_confidence = (agent_confidence_map or {}).get(src_agent)
+
+                edge_discount, reasons = self.compute_edge_discount(
+                    src_agent, dst_agent, src_confidence
+                )
+
+                new_cumulative = 1.0 - (1.0 - cumulative_discount) * (1.0 - edge_discount)
+
+                discounts.append(DiscountEdge(
+                    src=node_id,
+                    dst=nxt,
+                    discount=round(new_cumulative, 4),
+                    reasons=reasons,
+                ))
+
+                if nxt not in seen:
+                    seen.add(nxt)
+                    frontier.append((nxt, d + 1, new_cumulative))
+
+        return DiscountReport(
+            origin_node=origin_node,
+            origin_agent=origin_agent,
+            origin_confidence=origin_confidence,
+            discounts=discounts,
+            depth=depth,
+        )
+
+    def apply_discount(self, score: float, discount: float) -> float:
+        """Apply a cumulative discount to a confidence score."""
+        return max(0.0, round(score * (1.0 - discount), 4))
+
+
+__all__ = [
+    "ConfidenceDiscountPropagator",
+    "DiscountReport",
+    "DiscountEdge",
+]
diff --git a/tests/test_multiagent.py b/tests/test_multiagent.py
index c78cd3ec..50c4f5d5 100644
--- a/tests/test_multiagent.py
+++ b/tests/test_multiagent.py
@@ -15,6 +15,8 @@
 from agentwatch.orchestration.spawning import SpawningTracker, SpawnLimitExceeded
 from agentwatch.orchestration.trust import InterAgentTrust
 
+from agentwatch.orchestration.discount import ConfidenceDiscountPropagator, DiscountReport
+
 # ─────────────────────────────────────────────
 # MAG-001 — Inter-Agent DAG
 # ─────────────────────────────────────────────
@@ -288,3 +290,95 @@ def test_spawning_descendants():
     tr.register("grand", parent_id="child1")
     desc = tr.descendants("root")
     assert {n.agent_id for n in desc} == {"child1", "child2", "grand"}
+
+
+# ─────────────────────────────────────────────
+# MAG-010 — Confidence Discount Propagation
+# ─────────────────────────────────────────────
+
+
+def test_discount_propagation_undiscounted_when_trust_high():
+    dag = InterAgentDAG()
+    dag.add_node("n1", "agent-a", "produce")
+    dag.add_node("n2", "agent-b", "consume")
+    dag.add_edge("n1", "n2")
+
+    trust = InterAgentTrust()
+    for _ in range(5):
+        trust.record("agent-a", "agent-b", success=True)
+
+    prop = ConfidenceDiscountPropagator(trust=trust)
+    report = prop.propagate(dag, "n1", "agent-a", 0.95)
+    assert report.origin_node == "n1"
+    assert report.depth >= 0
+    # With high trust the discount should be 0
+    assert all(e.discount == 0.0 for e in report.discounts)
+
+
+def test_discount_propagation_applies_discount_when_trust_low():
+    dag = InterAgentDAG()
+    dag.add_node("n1", "agent-a", "produce")
+    dag.add_node("n2", "agent-b", "consume")
+    dag.add_edge("n1", "n2")
+
+    trust = InterAgentTrust()
+    for _ in range(5):
+        trust.record("agent-a", "agent-b", success=False)
+
+    prop = ConfidenceDiscountPropagator(trust=trust)
+    report = prop.propagate(dag, "n1", "agent-a", 0.95)
+    assert len(report.discounts) == 1
+    assert report.discounts[0].discount > 0.0
+
+
+def test_discount_chain_propagates_downstream():
+    dag = InterAgentDAG()
+    dag.add_node("n1", "agent-a", "start")
+    dag.add_node("n2", "agent-b", "middle")
+    dag.add_node("n3", "agent-c", "end")
+    dag.add_edge("n1", "n2")
+    dag.add_edge("n2", "n3")
+
+    trust = InterAgentTrust()
+    for _ in range(5):
+        trust.record("agent-a", "agent-b", success=False)
+        trust.record("agent-b", "agent-c", success=True)
+
+    prop = ConfidenceDiscountPropagator(trust=trust)
+    report = prop.propagate(dag, "n1", "agent-a", 0.9)
+    assert len(report.discounts) == 2
+    # The first edge discount should be > 0 (low trust)
+    assert report.discounts[0].discount > 0.0
+
+
+def test_apply_discount_lowers_score():
+    prop = ConfidenceDiscountPropagator()
+    result = prop.apply_discount(0.85, 0.25)
+    assert result == 0.6375
+
+
+def test_apply_discount_clamps_at_zero():
+    prop = ConfidenceDiscountPropagator()
+    result = prop.apply_discount(0.5, 2.0)
+    assert result == 0.0
+
+
+def test_discount_report_max_downstream():
+    report = DiscountReport(
+        origin_node="n1",
+        origin_agent="a",
+        origin_confidence=0.9,
+        discounts=[
+            DiscountEdge(src="n1", dst="n2", discount=0.1),
+            DiscountEdge(src="n2", dst="n3", discount=0.35),
+        ],
+    )
+    assert report.max_downstream_discount == 0.35
+
+
+def test_discount_empty_dag_returns_empty_report():
+    dag = InterAgentDAG()
+    prop = ConfidenceDiscountPropagator()
+    report = prop.propagate(dag, "nonexistent", "agent-x", 0.5)
+    assert report.discounts == []
+    assert report.depth == 0