Traditional Identity Management Systems: Challenges & How Blockchain-AI Solutions Can Overcome Them

5 min readJun 17, 2025

Traditional identity verification systems have proven that they cannot be trusted to safeguard your personal data (such as your biometric information👁️🖐️🆔). The recent Coinbase data leak is a prime example.

Decentralized identities serve as better alternatives. A decentralized identity 🪪(DIDs) is your identity on a blockchain network. It can be verified in a safe and confidential manner.🛡️

Let’s take a look at some of the major drawbacks of traditional identity verification systems and how DIDs differ from them. 🔽

Challenges in Traditional Identity Management Systems

Security Vulnerabilities: Centralized databases in traditional systems are the number one targets of hackers. Breaches, even trivial ones, can lead to massive data leaks, exposing sensitive personal information. This may also result in identity theft and financial losses.

Password Overuse: Users often use the same passwords across different platforms. This is a weak password practice and leads to increased risks.

Password Fatigue: When using different passwords for different accounts, users usually tend to follow risky password practices such as saving their passwords on browsers or browser extensions. This phenomenon called password fatigue, may result in a data leak.

Inefficient Verification Processes: Manual verification methods have become so time-consuming and are easily hackable. It also brings delays and inaccuracies in identity confirmation.

Lack of User Control: Individuals have very limited oversight over how their personal data is stored, shared, or utilized, leading to confidentiality concerns and potential misuse of information. Educating them on how their data is handled and processed is one way to reduce the amount of data that’s shared with third parties, thereby reducing the risk of a data leak.

Blockchain Based Identity Management System

Blockchain technology has a number of game-changing benefits for managing identities, changing the way authentication and identity verification are done at their core.

Decentralization

Distributed Ledger: Blockchain uses the distributed ledger in identity management. This will be done by using data, which is stored on many nodes instead of a single central server.

User Control: Blockchain lets the users take control of their own identity management system instead of relying on the central authority.

Immutability

Permanent Records: With blockchain it is nearly impossible to erase or alter the data without the agreement of the whole network. This characteristic of the blockchain is termed immutability as the record stays unchangeable. So any alteration in identity management becomes impossible when stored in a blockchain network.

Audit Trails: The openness of the blockchain paves the way for extensive audit trails. Blockchain’s auditability and transparency makes it easier to keep track of changes and confirm identities. This is very important for compliance in businesses that are regulated.

Enhanced Security

Cryptographic Protection: Blockchain employs complex cryptographic methods to protect data. Altering cryptographically encrypted data would require one to decrypt them first, which is close to impossible.

Reduced Fraud: Blockchains have unique features, such as cryptographic signatures, timestamps, consensus based verification, and self-executing smart contracts, that assist in reducing identity fraud and make it easier to verify identities.

Challenges and Considerations

While blockchain and AI offer promising solutions, several challenges must be addressed. Some of them are discussed below

Data Privacy Concerns: Biometric data in blockchain is raising privacy concerns. Because unlike passwords, the biometric identifiers possess the risk of being permanent and unchangeable in the blockchain system. In case the system is compromised, it will become more dangerous and can lead to profiling or even identity theft.

To mitigate this, blockchain employs ZKP, where user identity verification will happen without exposing the underlying biometric details. In this process, ZKP stores cryptographic proof or a hash of the biometric data instead of storing the original data.

Technological Integration: Technical hurdles arise when we integrate AI with blockchain’s decentralized architecture. Because, blockchain networks value decentralization, consensus, and immutability, while AI models, on the other hand, need big datasets and processing resources. These differing values and paradigms demand complex system architecture for efficient interoperability:

Consensus Mechanisms: AI-powered consensus can improve decision-making and discover anomalies, but it must avoid centralization and retain confidence.
Energy Conservation: AI models running on-chain are resource-intensive and expensive. To reconcile performance and confidentiality, hybrid architectures with off-chain sensitive computations like ZKP generation and on-chain proofs or summaries are used.

Data Integrity and Provenance: Blockchain ensures AI training data integrity and traceability, yet real-time, high-volume data streams are difficult to integrate.

Regulatory Compliance: Blockchain and AI must meet the global data protection regulations — GDPR in Europe, CPA in California, DPDPA in India, and others. These laws make sure that no personal and biometric data is accessed or modified.

User Acceptance: Educating users about the benefits and security of these technologies is essential to gain their trust and acceptance.

How BeldexAI Can Help with Identity Management

BeldexAI can help with managing identities on-chain by verifying the authenticity of personal information shared, without revealing it.

For example, the Beldex Research Labs team is researching a prototype on-chain identity verification system that hashes raw-data such as fingerprint, iris and retinal scan, facial and voice recognition data, as well as the finger vein pattern. While centralized systems fall prey to hackers by storing this raw-data in centralized servers, Beldex takes a different approach.

It hashes the biometric data, meaning that a unique hash is generated for each biometric information. Only this hash (an encrypted, blockchain-based stand-in for the raw-data) is verified to authenticate the identity of the individual ensuring that the biometric information remains protected at all times.

Conclusion

Traditional identity management systems face prominent challenges in today’s world. Because the hacking systems have become so strong, the identity management system should also become robust.

Blockchain and AI technologies are ruling the technological world recently. So it might be the best idea to integrate both into identity management. This will mitigate the weak password problems by bypassing the native way with an innovative approach.