Blockchain and Machine Learning for Fraud Detection: A Privacy-Preserving and Adaptive Incentive Based Approach

Financial fraud cases are on the rise even with the current technological advancements. Due to the lack of inter-organization synergy and because of privacy concerns, authentic financial transaction data is rarely available. On the other hand, data-driven technologies like machine learning need authentic data to perform precisely in real-world systems. This study proposes a blockchain and smart contract-based approach to achieve robust Machine Learning (ML) algorithm for e-commerce fraud detection by facilitating inter-organizational collaboration. The proposed method uses blockchain to secure the privacy of the data. Smart contract deployed inside the network fully automates the system. An ML model is incrementally upgraded from collaborative data provided by the organizations connected to the blockchain. To incentivize the organizations, we have introduced an incentive mechanism that is adaptive to the difficulty level in updating a model. The organizations receive incentives based on the difficulty faced in updating the ML model. A mining criterion has been proposed to mine the block efficiently. And finally, the blockchain network is tested under different difficulty levels and under different volumes of data to test its efficiency. The model achieved 98.93% testing accuracy and 98.22% Fbeta score (recall-biased f measure) over eight incremental updates. Our experiment shows that both data volume and difficulty level of blockchain impacts the mining time. For difficulty level less than five, mining time and difficulty level has a positive correlation. For difficulty level two and three, less than a second is required to mine a block in our system. Difficulty level five poses much more difficulties to mine the blocks.