TechnologyHow blockchain technology can prevent frauds

How blockchain technology can prevent frauds

An organization loses about five percent of its revenues to fraud each year. Unfortunately, according to a case study by the Association of Certified Fraud Examiners, copy in a business can go undetected and is often hard to uncover for a long time. Three features of blockchain can help to make business networks less susceptible to fraud.

As we know, fraud can be a business that can go undetected for a long time and is hard to be revealed soon. Blockchain can also be used to fight or prevent fraud in a business network.

Without a single entity having to take responsibility for safeguarding the data.One of the significant components that determine the value of blockchain is its ability to share data quickly and securely.

Enhanced security is a leading benefit of blockchain technology.

  • Blockchain stems from how the technology works: Blockchain can create an unalterable record of transactions with end-to-end encryption, lowering the chances of fraud and unauthorized activities. Data on the blockchain can be stored across a network of computers, making it nearly impossible to hack as it’s massive. Furthermore, by anonymizing data and requiring permissions to limit access, blockchain can address privacy concerns better than traditional computer systems.
  • As a series of  “blocks” of transactions can be added to the blockchain before that, participants should agree that the transaction is valid through a process called consensus. It can be recorded on blockchain and is immutable because it cannot be deleted or changed. 
  • By Securing it through cryptography and linked to the previous block in the chain, a block is given a timestamp; for example- By using blockchain, we can see the number of assets, where it came from, where it is stored, where it’s been, and who’s had ownership of it we get all of the information. You can create transactions to change the state of an asset, it will then be in the form of blocks added to the chain, and the original record will still be accessible. 

Features of blockchain that helps to prevent fraud:

  • Permissions in Blockchain—A Business deal can have a lot of confidential data, which the company cannot afford to lose as it is sensitive to the company, so access cannot be provided quickly. There should be a way to ensure outsiders shouldn’t have access to the data to prevent corruption. This is where permissions come to play and are very important and required.
  • However, permission in networking is suitable for fraud prevention as they can restrict the permissions like who can be allowed to participate and in what capacity members can access the network.
  • For example-Hyperledger Fabric is a blockchain implementation framework hosted by the Linux Foundation, so the participants are supposed to issue a cryptographic membership card that can help represent identity. It grants access to see the transactions that pertain to them, and even credentialed users can’t add information to the blockchain without consensus. When the information is encrypted, no one can tamper with records on the blockchain.

Blockchain is distributed

  • It is a distributed digital ledger containing transaction data that is shared across and has a peer-to-peer network. There will be no central admin or centralized version, so there is no single point of failure. Instead, management and authorization are spread across the network, so there is no prominent place for someone to instigate a fraud scheme.
  • Fraudsters use several methods to hide their criminal activities, including altering, misusing, or deleting information in a company’s accounting systems, paper documents, and creating fraudulent files. Using a shared digital ledger can also help reduce fraud cases as it increases the visibility and the transparency of the transactions made throughout a supply chain and between business network members.

Blockchain is immutable

  • Where transactions are recorded, and the data is stored, which is immutable on blockchain as they cannot be deleted, altered, or changed furthermore. So before a block of transactions can be added to the blockchain, a network of participants should agree that the transaction is valid throughout the process, which is also called consensus in blockchain technology. 
  • The block is then given a timestamp and secured through cryptography which is then linked to the previous block in the chain and is all interconnected. We can also create a new transaction to change the state of an asset, it will be added to the chain, and then the original record will still be accessible. So, by using blockchain, you can see the provenance of an asset, including where it came from, where it’s been, and who’s had ownership of it.

Preventing fraud in finance

  • Many factors can complicate financial transactions: the need for collateral, the total time required for settlements and the differences in currency denominations, or third-party mediation, and more are examples.
  •  Multi-step processes are the ones that require human interaction, and are prime targets for fraudsters. With blockchain, information can be shared in real-time; Ledger can only be updated when all parties or participants agree on the statement. It can reduce time, costs, and opportunities to commit fraud.

Preventing identity fraud

  • One example is that last year, identity theft and fraud cost consumers $16 billion, and the threat of online fraud and altering data has been spurred on by many credit card companies and financial institutions that can help the organization alert the consumers or customers when there is a potential fraud taking place. Hence this doesn’t stop the criminals from stealing the information and misusing it.
  • Can a person’s digital identity be secured by preventing it from being tampered with or used in an unsanctioned way? Blockchain can make it possible. If information is identified on a permissioned blockchain framework, authorized parties will access one version of the truth. One of the only known participants can verify transactions and ensure records are valid.
  • Organizations can efficiently validate customers’ identities and arrange new services by reducing redundant verification processes so that issues and the amount of paperwork needed to execute them are not altered. Blockchain networks allow individual consumers to control what information they share online or validate information for various processes.

Preventing fraud in a supply chain

  • Fraud related to financial institutions often comes to media attention; supply chains are also an important issue as they are complex and usually involve many people; there are a lot of loopholes where the fraud can take place and go undetected.
  • Blockchain can help reduce and prevent fraud in the supply chain through greater transparency and improved traceability of products. It’s challenging to manipulate the blockchain; An immutable record can only be updated or validated through consensus among many network participants. For example, if a product is digitized, it can easily be traced back to its origin as the information is shared and is also a distributed ledger. 
  • The Traditional paper form of tracking is manual inspection which results in inaccuracies and can be high risk if the product is in the food industry. For example, Walmart has explored using blockchain to improve food traceability, authenticity, and safety as an alternative. 
  • Blockchain networking makes it possible to trace information of a product in a few seconds— a process that previously took almost seven days. Accessing data so quickly could help reduce food frauds such as substitution and misrepresentation and improve response time when contamination is discovered.

Credit Evaluation of Internet Finance 

Based on blockchain and decision tree algorithm-

  • The development of technology has evolved with the Internet, the state of internet finance in the capital market is becoming more critical. As the technical support of digital currency, blockchain technology has also received attention from various industries in my country. Since most internet finance deals online, credit risk has become the most critical risk in the internet finance market.
  • So the blockchain technology is built on the P2P system, which can solve the credit risk of internet finance. With the twenty-first century, with the beginning of emerging technologies such as cloud computing and the Internet of Things, research on personal credit evaluation has developed rapidly in the twenty-first century.
  • Traditional personal credit evaluation research shows that there is no comprehensive evaluation technology; especially, the Internet financial platform with defects of low information transparency and centralization.

Internet finance personal credit assessment

Internet finance development model

It is basically like a value exchange across time and space. Unlike traditional finance systems, the main body of trust is conventional, then the finance is the central bank, and the central bank has a rigid payment system. Still, it also has the power that can be abused. The credit records established on the Internet are searchable.Development of technology, security, and high yield has become typical features of Internet finance.


Decision tree algorithm

A decision tree algorithm is like an information classification capability as an inductive induction algorithm. The purpose is to improve the final decision and conclude correct information. The structure of the fusion model is depicted below: 

 A machine learning method used in regression and the classification of tasks is called a Gradient boosting decision tree (GBDT). It basically produces a prediction model.

A binary classification model is widely used in the industrial field called Logistic regression (LR). A layer of sigmoid function mapping is an add-on to mapping features to results to predict the value based on linear regression. 

Output probabilities of different categories are limited to [0, 1]. The chance is p (y = 1\ x, θ) that represents the probability where y belongs to 1 as given by the characteristic variable x, and (x) = p (y = 1| x, θ), then there is a logistic regression model.


We are assuming that each sample in the data set is independent of each other, the likelihood function:


The probability of distribution is P (X, Y), and P (X, Y) independently and identically generates the training data set:


So available:


Gradient descent method is used to obtain the parameter θ with the limited learning ability of the LR model, and a large amount of artificial feature engineering is usually required to improve the learning ability of the model.

Blockchain intelligent technology

As we know, blockchain is like a disruptive technology that is one of the leading new fields of technology that creates industrial changes in the world and is driving the transition from “Internet of Information” to “Internet of Value.

Decentralized and consensus mechanism 

Decentralization is one of the significant features of blockchain technology, as there is no central node in the blockchain to regulate rules. The accounting rules are pretty much public (i.e., consensus mechanism), and all members can participate.

Tamper proof and are easy to check 

Blockchain uses a hash function to encrypt its data. Each data block contains some information, such as the first or last block data, the transaction information, and the transaction time. Based on this, a new partnership is formed, and as long as the information is verified, which has been asked and the blockchain formed in this way is relatively easy to verify.

Smart contract

A smart contract is a very different kind from a traditional contract. It is more like a simple program that can be automatically executed as long as the conditions agreed by the program are triggered and met. The related transactions of the contract will be automatically executed without manual intervention. Smart contracts are an essential feature of blockchain technology. Because the system avoids the center’s interference with transactions, the data can only be increased, not tampered with, or deleted.


We thus conclude that blockchain cannot eliminate all types of fraud with blockchain technology, thefts can still occur, and frauds can still happen. However, those thefts are mainly due to attempts to layer services on top of blockchain instead of core technology. And while blockchain networks are built keeping in mind decentralized control, the infrastructure can leave back doors open to vulnerabilities that allow tampering and unauthorized access. That is why enterprises need to use a blockchain designed for business, on the proper infrastructure, and with the right services.

Also Read: Disrupting Crowdfunding With Blockchain


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