After the down fall of the unitary Government of Derg, Ethiopia has adopted Federal Government on the basis of ethnicity. Following this period ethnic and inter-ethnic conflicts and grievances have become exacerbated.Federal system conceived as mechanism to manage inter-ethnic conflict. It also argued that ethnic based federalism is the right way to peace and security, development, and to ensure unity in diversity among diverse ethnic groups in Ethiopia. The communities in the study area had a long history of peaceful co-existence and communal ties such as inter-marriage, however, disputes and incidences of violent conflicts have been observed after the formation of ethnic based federal system in Ethiopia. The merits of ethnic federalism particularly as mechanisms to minimize ethnic tension and conflicts and the opportunities and challenges with ethnic based federal system critically examined. Different methods were employed to convey sustainable peace and security, and to restore the community to peaceful co-existence but failed to bring any effect in Ethiopia.