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I have started taking interest in smart contracts and got to understand solidity and erc20 tokens a bit. Still I am not able to understand how can I design a dapp based on ethereum which can be used for identity of a person.

What should represent the identity (map address with identity proof)? What would be role of transaction in this case?

I am not able to get a larger picture.

Any flowchart, architecture diagram etc would be very helpful.

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Definitely take a look at uPort by Consensys. It's arguably state of the art. Search for word such as "self sovereign identity."

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