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The article explains the state of political transition in Ethiopia since Prime Minister Abiy Ahmed came to power in 2018 based on the concept of political settlement in the context of divided societies. It is qualitative research based on in-depth interviews with fifteen key political party leaders and key experts. Relevant literature on democratization in Ethiopia has been reviewed and has rarely explored the issue of democratization in the context of divided societies. Ethiopia is a deeply divided society that hosts countless politically mobilized ethnonational liberation movements seeking more political autonomy and a fair share in central decision-making institutions. While Ethiopians and the international community hoped for Ethiopia’s transition to democracy under Abiy, the findings show that the transition is stalled, and the process is hijacked by centralizing and increasingly authoritarian elite that has marginalized key political actors. Centralization and marginalization are currently two major challenges. Both are inimical to deeply divided Ethiopia that hosts a variety of territorially based cleavages. Cycles of marginalization have entrenched fragility in Ethiopia, as the fight continues between those who are in power and those who are excluded. Transition to democracy implies an inclusive political system, popular and elite support for democracy and democratic rules are accepted as norms, anti-system parties are weak or nonexistent, and, most importantly, authoritarianism is rejected wholeheartedly. This is a fundamental question for Ethiopia and is called the genetic question of democracy because it determines the gateway and the answer to the question: How does democracy come into being in the first place? One cannot have democracy when a country has a significant number of armed rebel groups in or outside the country who still think that power comes through the barrel of a gun. Nor is the transition to democracy possible when the elite in power adopts violence and the use of force as a means to stay in power. Transition to democracy can succeed only through an inclusive dialogue that produces political settlement addressing the deep cleavages.