A federalized Iraq might well function much more peacefully as a state than it
does now. Each faction would have more self-determination. Each could make
its own decisions on a local level. Setting boundaries would be a problem.
However, most groups have their own time-honored territories. Once the
mini-states were established, political tensions might ease, allowing the
country as a whole to find a way to work in harmony.
A federal state in Iraq is unlikely to be effective, since Iraq is not a cohesive nation-state. Due to the conflict between Sunni, Shi'ite, and Kurd, it will be very difficult to run Iraq on a federal basis, and it is quite possible that it should be split into three different nations, assuming of course that voters approve of this. The borders were drawn by colonial occupiers and not necessarily in accordance with national or ethnic boundaries in mind.