Since its introduction in Ethiopia, the benefits of ethnic federalism in addressing diversity, reducing tensions, and promoting sustainable peace have been debated. On the one hand, ethnic federalism recognizes the authority and right of ethnic groups and identities to self-governance. On the other hand, the country’s federalism has given some ethnic groups a greater advantage over others, even though they have long coexisted in the area and consider themselves owners of the ethnic homeland. The main objective of the study is to examine the impact of ethnic federalism on conflict dynamics and sustainable peace in Ethiopia. Centripetalism theory was employed to examine the impact of ethnic federalism on conflict dynamics and sustainable peace in Ethiopia. A qualitative research approach with a descriptive case study was applied, and interview and document analysis were used to collect data. A purposive and convenience sampling technique was used to select the study participants. The collected data was analyzed thematically. Even though the study’s finding shows mixed results, a significant majority of participants indicated that ethnic federalism has contributed to conflict and affected sustainable peace by exacerbating ethnic divisions, ethnic extremism, competitions among groups, and conflictual inter-regional relations, making some second-class citizens in a territory they consider their homeland. Hybrid federalism (a combination of both ethnic and civic elements) with emphasis on the people’s agreement is recommended as Ethiopia’s best government system.